Financial institutions

Large Financial Institutions Could Face Additional FDIC Obligations to Manage Climate-Related Financial Risks

The Federal Deposit Insurance Corporation (FDIC) has asked for comment on its new Statement of principles for managing climate-related financial risks. The proposed principles encourage major financial institutions and banks to control and manage climate-related financial risks.

To which institutions do the principles apply?

The statement applies to large financial institutions with more than $100 billion in total consolidated assets. It defines “financial institutions” as “insured non-member state banks, state-approved insured branches of foreign banks that are subject to the provisions of Article 39 of the Federal Law on Deposit Insurance and state savings associations.

The statement follows that of the Securities and Exchange Commission climate-related disclosure rule. The FDIC statement largely mirrors the Office of the Comptroller of the Currency’s recent draft principles on managing climate-related financial risk exposure, which applies to domestic banks, federal savings associations, and federal branches or agencies of foreign banking organizations. There is no doubt that the regulatory focus on climate-related risks and disclosures continues to grow.

What guidance do they give institutions to manage climate-related financial risks?

The statement assumes that climate change and the transition to a low-carbon economy “present emerging economic and financial risks that threaten the safety and soundness of financial institutions and the stability of the financial system.” The FDIC has recognized “the need for comprehensive risk management guidelines that can be implemented consistently.” The statement’s draft principles are intended to provide a high-level framework that the FDIC will expand on in future guidance.

1. Make sure your board and management are actively involved

The statement responds to the need for effective risk governance that includes a board and management that:

    • Understanding exposure to climate-related financial risks
    • Review relevant information
    • Allocate appropriate resources
    • Assign responsibilities for climate-related financial risks across the organization

Management should also include climate-related risks in policies, procedures and limits to provide detailed guidance on the institution’s approach to these risks.

2. Include climate-related issues in strategic planning

The board and management should consider significant exposures to climate-related financial risks when setting overall business strategy. Climate-related strategies should also align with the institution’s broader strategy, risk appetite and management framework. Public statements about an institution’s climate strategies should be consistent with internal strategies.

3. Design ways to measure and monitor climate-related risks

The statement notes that good risk management includes developing processes to measure and monitor material climate-related financial risks. Relevant tools and approaches include exposure analysis and scenario analysis. The FDIC refers to scenario analysis as “exercises used to perform a forward-looking assessment of the potential impact on an institution of changes in the economy, financial system, or distribution of physical hazards resulting from climate-related risks.” The board and management should also consider climate-related financial risks when underwriting and monitoring portfolios and assess whether they could affect liquidity.

These principles are broad and more detailed guidance is yet to come. In the meantime, the FDIC has comments requested, including in response to specific questions. The comment period will last 60 days from publication in the Federal Register. The FDIC and OCC statements make clear how major financial institutions and banks will need to identify and manage climate-related financial risks. Smaller institutions may also experience a ripple effect, as regulators may eventually seek to apply a similar approach across a broader spectrum.