Federal banking regulators issued a long-promised framework that provides guidance on the safe and sound management of climate-related financial risks at large banks.
The Federal Reserve Board, Treasury Department’s Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation published the framework Tuesday for banks with more than $100 billion in assets.
The regulators said large banks are “likely to be affected” by both physical and transitional risks posed by climate change. Physical risks include climate change-induced weather events, such as floods, droughts, or other natural disasters. Transitional risks cover risks posed to banks as markets react to changes caused by climate change, like the increase in clean energy production or new climate-related regulation or laws that affect banks’ bottom lines.
The framework contains high-level principles covering six areas: governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement, and reporting; and scenario analysis, according to an executive summary.
Many financial institutions have already expressed support for the framework, like the 19 large banks in the United States and Canada that joined a climate risk consortium in January 2022 or the six large banks that agreed in September 2022 to participate in a climate scenario analysis exercise.
The framework describes how climate-related financial risks can be addressed in specific risk areas, including credit, liquidity, other financial risks, operational, legal and compliance, and other nonfinancial risks.
Between December 2021 and December 2022, banking regulators separately issued principles for climate-related risk management at large banks. The new framework makes clear any climate-related risks banks include in their risk management programs must be material.
“Banks need to understand, and appropriately manage, their material risks, including the financial risks of climate change,” said Fed Chair Jerome Powell in a statement. “The guidance issued … is squarely focused on prudent and appropriate risk management. I am therefore able to support its issuance.”
Powell stressed banking regulators are not attempting to become climate change regulators, which he said is the purview of elected branches of government. He added the framework is not intended to steer banks away from lending to certain sectors of the economy that some argue contribute to climate change.
In a statement, Republican Fed Governor Michelle Bowman voted against the framework, saying it will “create confusion about supervisory expectations and will result in increased compliance cost and burden without a commensurate improvement to the safety and soundness of financial institutions or to the financial stability of the United States.”