The FDIC Board is considering today, jointly with the Board of Governors of the Federal Reserve and the Comptroller of the Currency, guidance on Principles for Climate–Related Financial Risk Management for Large Financial Institutions.
These principles provide a high–level framework for the safe and sound management of exposures to climate–related financial risks. They are intended to support efforts by large financial institutions to focus on key aspects of climate–related financial risk management. I strongly support these principles. I believe they provide an important foundation for addressing the financial risks associated with climate change.
Climate–related financial risks pose a clear and significant risk to the U.S. financial system. If improperly assessed and managed, they may pose a threat to safe and sound banking and financial stability. These principles are designed to help financial institutions make progress toward incorporating climate–related financial risks into risk management frameworks in a manner consistent with safe and sound practices. They provide general principles with respect to governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement, and reporting; and scenario analysis. They also provide guidance on how climate–related financial risks can be addressed in the management of traditional risk areas, such as credit, liquidity, operational risk, and legal and compliance risks.
Regarding the intended scope of application of the principles, I would highlight that although all financial institutions, regardless of size, may have material exposures to climate–related financial risks, these principles are intended for the largest financial institutions, those with over $100 billion in total consolidated assets. The FDIC understands smaller institutions, including community banks, may have limited resources and may experience the impacts of climate–related financial risks in a manner that differs from large financial institutions.
It is important to recognize that the financial risks associated with climate change should not be viewed solely as a longer–term consideration. The financial system has always had severe weather events to contend with. Thus far, the banking industry has handled these events relatively well. However, there is potential for past mitigation strategies to become less effective.
For example, we have seen recently how insurance policies can become more expensive or unavailable to cover climate–related losses in certain markets or for certain exposures, particularly those faced with increasing severity and frequency of weather events.1 It is important for financial institutions to consider the potential impact of material climate–related financial risk exposures on their financial condition, operations, and business objectives over short, medium, and longer term time horizons.
I would like to emphasize, as I have in the past, that the FDIC’s role with respect to climate change is centered on the financial risks that climate change may pose to the banking system and individual institutions, and the extent to which those risks impact the FDIC’s core mission and responsibilities. The FDIC is not responsible for climate policy and does not tell banks which customers to serve.
Financial institutions should fully consider climate–related financial risks—as they do all other risks—and continue to take a risk–based approach in assessing individual credit and investment decisions. The FDIC expects financial institutions to manage climate–related financial risks in a manner that will allow them to continue to prudently meet the financial services needs of their communities, including low–and–moderate–income and other underserved consumers and communities.
It is also important for the federal banking agencies to promote consistency in climate–related financial risk management. After previously issuing separate proposals, the FDIC, the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency have now jointly developed final principles for climate–related financial risk management for large banks. Going forward, the FDIC will continue to engage with our fellow regulators and the industry on how we can all best address climate–related financial risk.
Finally, I would like to thank the FDIC staff for their thoughtful work in bringing these principles to the Board today, and I would also like to thank the staff at the OCC and Federal Reserve for all their hard work and contributions as well.
1 For example, see https://www.wsj.com/economy/housing/home-insurers-are-charging-more-and-insuring-less-9e948113?page=1 and https://www.wsj.com/personal-finance/americans-are-bailing-on-their-home-insurance-e3395515?page=1 and https://www.wsj.com/finance/insurance-catastrophe-reinsurance-hurricane-77a69eab?page=1