FDIC Publishes Draft Principles on Climate-Related Financial Risks
The Federal Deposit Insurance Corporation (FDIC) is consulting on the statement on principles for the management of climate risk by large financial institutions, with comment period ending on June 3, 2022.
The draft principles are targeted at the largest financial institutions, those with over USD 100 billion in total consolidated assets. The draft principles are intended to support efforts by large financial institutions to focus on key aspects of climate-related financial risk management and provide a high-level framework for the safe and sound management of exposures to climate-related financial risks. The draft principles will help address key questions on climate exposures and incorporate climate-related financial risks into the risk management frameworks of financial institutions. The draft principles cover aspects related to governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement, and reporting; and scenario analysis. The principles stipulate the following:
- Material climate-related financial risk exposures should be clearly defined, aligned with the institution’s risk appetite, and supported by appropriate metrics (for example, risk limits and key risk indicators) and escalation processes.
- Tools and approaches for measuring and monitoring exposure to climate-related risks include, among others, exposure analysis, heat maps, climate risk dashboards, and scenario analysis. These tools can be leveraged to assess an institution’s exposure to both physical and transition risks in both the shorter and longer term.
- Since data, risk measurement, modeling methodologies, and reporting continue to evolve at a rapid pace, management should monitor these developments and incorporate them into their climate risk management as warranted.
- Management should develop and implement climate-related scenario analysis frameworks in a manner commensurate to the institution’s size, complexity, business activity, and risk profile. These frameworks should include clearly defined objectives that reflect the institution’s overall climate risk management strategies.
- Management should identify emerging risks that could be related to credit, liquidity, operational, legal and compliance, and other financial and nonfinancial risks; it should develop and implement appropriate strategies to mitigate these risks.
- Effective credit risk management practices could include monitoring climate-related credit risks through sectoral, geographic, and single-name concentration analyses, including credit risk concentrations stemming from physical and transition risks.
FDIC plans to elaborate on these draft principles in subsequent guidance that would distinguish roles and responsibilities of boards of directors and management, incorporate the feedback received on the draft principles, and consider lessons learned and best practices from the industry and other jurisdictions. FDIC encourages financial institutions to consider climate-related financial risks in a manner that allows them to continue to prudently meet the financial services needs of their communities. This request for comment from FDIC is substantively similar to the one issued by the Office of the Comptroller of the Currency on December 16, 2021.
Related Links
Keywords: Americas, US, Banking, Climate Change Risk, ESG, Sustainable Finance, Disclosures, Credit Risk, Liquidity Risk, Operational Risk, Scenario Analysis, Compliance Risk, Reporting, FDIC, Subheadline
Featured Experts
Laurent Birade
Advises U.S. and Canadian financial institutions on risk and finance integration, CCAR/DFAST stress testing, IFRS9 and CECL credit loss reserving, and credit risk practices.
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Previous Article
US President Signs Executive Order on Development of Digital AssetsRelated Articles
EU Agencies Update LCR Rule and Macro-Prudential Policy Recommendation
The European Commission (EC) published the Delegated Regulation 2022/786 with regard to the liquidity coverage requirements for credit institutions under the Capital Requirements Regulation (CRR).
EBA Publishes Regulatory Standards to Identify Shadow Banking Entities
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying the criteria to identify shadow banking entities for the purposes of reporting large exposures.
EIOPA Examines Physical Climate Risk Exposure, SII Non-Compliance
The European Insurance and Occupational Pensions Authority (EIOPA) published a report assessing insurers' exposure to physical climate change risks
NGFS Report Explores Quantification of Climate Risk Differentials
The Network for Greening the Financial System (NGFS) published two reports to aid central banks and regulators in their oversight of the financial sector and in their central bank operations
EC Publishes Results on Review of Web Accessibility Directive
The European Commission (EC) published the results of a public consultation, held in October 2021, on the review of the Web Accessibility Directive.
MAS Consults on Adjustment Spreads for Conversion of SOR Contracts
The Monetary Authority of Singapore (MAS) and the SC-STS are jointly consulting, until June 10, 2022, on setting adjustment spreads for the conversion of legacy SOR contracts to SORA reference rate.
OSFI Discusses Benchmark Rate Transition, Sets Out Work Priorities
The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.
EBA Proposes Standards to Support Secondary NPL Markets
The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).
EBA Issues Standards for Crowdfunding Service Providers Under ECSPR
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.
