Climate risks worse for financially vulnerable people, warns US bank regulator

A US bank regulator has warned that financially vulnerable people could face greater risks from the adverse effects of climate change and its associated economic fallout. The Federal Deposit Insurance Corporation (FDIC) said that financial institutions should look to mitigate these impacts as part of their efforts to address climate risk.

The FDIC issued the warning as part of a set of draft principles on the management of climate risk by large banks. It pointed to research by the Federal Reserve Bank of New York, which found that the geographical distribution of low-income and minority groups make them more vulnerable to changes in weather patterns. The same groups are also less able to adapt to climate change because of their more limited access to insurance and credit.

“The manner in which financial institutions manage climate-related financial risks to address safety and soundness concerns should also seek to reduce or mitigate the impact that management of these risks may have on broader aspects of the economy, including the disproportionate impact of risk on low and middle-income communities,” said acting FDIC chair Martin Gruenberg.

The draft principles include a range of measures which the FDIC expects to be undertaken by banks with over $100bn in assets. They cover governance, strategy, risk management, disclosure, and scenario analysis, and are similar to the proposals currently under consideration by the Office for the Comptroller of the Currency (OCC). They are also in line with the recommendations issued by the Network for Greening the Financial System, which the FDIC has said it will join.

The FDIC is the primary regulator for nearly 4,000 banks and savings associations, mostly composed of small and medium-sized institutions. Banks fall under FDIC supervision if they are chartered by states and have opted not to join the Federal Reserve system.

Sustainable economy thinktank Ceres has called for the FDIC to take further steps, such as including climate considerations in its next risk review. The risk review is an exercise undertaken to identify risks to the banks under its supervision, or to the $120bn deposit insurance fund it oversees.

In a memo published earlier this year, Ceres also recommended that US financial regulatory agencies work together to conduct a policy “sprint” on climate risks – a short, timebound initiative to review climate risks facing financial institutions and to evaluate regulatory and policy gaps in supervision.

With the FDIC and OCC having published draft guidance on climate change, the Federal Reserve is now the only major US regulator left to do so. Chair Jerome Powell has said the Fed will follow suit in due course, and will look to achieve alignment with the other agencies.