In October 2021, Secretary of the Treasury Janet Yellen convened the Financial Stability Oversight Council to issue . This report laid out a series of recommendations and considerations to address these risks. Today’s guidance document builds on this effort.
Climate change is real. Private industry and governments around the world are preparing for how climate change will erode, degrade, or otherwise threaten our economic infrastructure, including our roads, railways, energy transmission lines, power grids, communications networks, and more.
Equally as important is the resilience of our financial system. We are already seeing certain cracks in the system, such as the recent mass cancellations of homeowner’s insurance policies due to climate-related risks. Banks, in particular, play an essential role for the functioning of society, and it is critical that they be able to meet the changing financing needs of their communities, and serve small businesses and households in times of stress or in the wake of a catastrophic event.
The banking regulatory agencies have developed some commonsense principles for very large banks (those with $100 billion or more in assets) to consider when managing these climate-related risks. Well-managed banks are already taking actions consistent with this guidance.
Over time, we should build on these principles to provide more detail. Rather than being vague or complex, I hope any future guidance and rules can embrace simplicity and bright line limits where appropriate.
Because they are also essential parts of our financial system infrastructure, we should provide more tools and guidance to small banks that are grappling with climate-related risks, as well.