Consideration of financial risks that climate change may pose to the banking system, and the extent to which those risks affect the federal bank deposit insurance agency’s core mission and responsibilities, is a role that will be taken by the agency, its interim head said Monday.
Noting that the Federal Deposit Insurance Corp.’s (FDIC) core mission is to maintain stability and public confidence in the U.S. financial system, agency Interim Board Chairman Martin J. Gruenberg also asserted that his agency is not responsible for climate policy. “As such, we will not be involved in determining which firms or sectors financial institutions should do business with,” he said.
He said those types of credit allocation decisions are responsibilities of financial institutions. “We want financial institutions to 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,” Gruenberg told the annual meeting of the American Bankers Association (ABA) held in Austin, Texas.
Gruenberg opened his speech by making those points, saying the agency wanted to make clear the FDIC’s role in addressing climate change.
The FDIC leader asserted that climate change is a risk to the financial system. He said rising sea levels, increases in the frequency and severity of extreme weather events, and other natural disasters “challenge the future resiliency of the financial system and, in some circumstances, may pose safety and soundness risks to individual banks.” He said the FDIC’s goal on climate-related financial risk is to “ensure that the financial system continues to remain resilient despite these rising risks.”
In any event, Gruenberg said the agency is in the “early stages of understanding and addressing climate-related financial risk.” He said the FDIC is working to develop a “fuller, more formal and dedicated, agency-wide understanding of climate-related financial risk.”
He told the bankers that all should recognize that climate change will increase the prevalence of climate-related financial risk. “Overreliance on insurance and government support presents additional risks, as these may not be able to compensate for losses to the same extent as they have in the past, or could become more expensive,” he said.
“This may stress the ability for smaller institutions to mitigate climate-related financial risk,” he added.
Gruenberg recommended that banks, including community and mid-size banks, seek to better understand and consider their own unique climate-related financial risk and how it may affect them. He suggested that bank boards and senior management seek a better understanding about how climate change and climate-related financial risk are affecting the bank’s business, customers, and communities, and how that risk may evolve over time.
“Banks may wish to consider developing appropriate sound governance frameworks and processes that have the capability for incorporating the assessment and management of climate-related financial risk as appropriate to their size, complexity, and risk profile,” he said. “The FDIC views strong corporate governance as the foundation for safe-and-sound operations. Effective governance frameworks help maintain profitability, competitiveness, and resiliency through changing economic and market conditions. Building this internal infrastructure and leveraging these processes early will assist institutions with prudently managing unforeseen climate-related shocks, as well as any potential gradual cumulative impacts of climate-related financial risk.
“Simply put, it’s just good governance to be prepared. And we can prepare now,” the FDIC leader added.