Campaigners call on US regulators to address climate risks in Basel III endgame

February 5, 2024|Written by |Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Federal Reserve

A coalition of 19 campaign groups has called on US regulators to better address climate risks in their planned rewrite of big banks’ capital obligations, including by introducing a “one-for-one” approach on new fossil fuel investments.

Groups including Friends of the Earth US, Public Citizen, Americans for Financial Reform and The Sunrise Project set out several recommendations for strengthening the reform, known as the “Basel III endgame” after the international standards it incorporates, in a letter seen by Green Central Banking.

The Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency – the three US agencies that decide bank capital requirements – had invited interested groups to respond to their proposal by 16 January 2024.

Drawn up in the wake of the 2008 financial crisis, Basel III is a sweeping rewrite of banking regulations intended to ensure that banks have enough capital to get through a future meltdown.

However, the letter argues that the regulators’ current proposal for implementing the standards in the US does not properly address an obvious threat to the stability of the financial system: climate change.

“Capital requirements should play an important role in mitigating these risks,” the letter states, and yet the regulators’ proposal is “confusingly silent” on how climate-related financial risks should be incorporated into them.

“We urge you to finalize strong rules that improve large bank safety and soundness and strengthen financial system resiliency, especially in light of the significant risks posed by climate change,” the campaigners wrote.

Among other recommendations, the letter argues that the risk weights set out in the final rules should reflect the extent of the climate-related financial risks to the type of exposure in question.

In the fossil fuel sector, a one-for-one approach – meaning that for every dollar invested, banks would need to hold a dollar – “is appropriate given the riskiness and volatility” of lending to a sector that is going to become obsolete.

The rules should require banks to take climate-related risk into account during the credit  assessment and underwriting process, while stress testing should also incorporate climate-related financial risks, the letter says.

Private sector groups have also written responses to the consultation expressing concern over the climate impact of the reform.

Bloomberg reports that Wall Street is unhappy about plans for banks to quadruple the risk weights assigned to tax-equity investments, a form of finance where banks receive tax credits in exchange for providing capital to green projects.

“This change, if adopted, would make it prohibitively expensive for banks to make certain tax equity investments,” Clifford Chance warned in a briefing note in October. The law firm predicted that this is “certain to have a harmful, albeit likely unintended, impact on the financing of clean energy and infrastructure projects”.

This page was last updated February 5, 2024

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