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
EBA Updates Mapping Between Reporting Data and Pillar 3 DisclosuresRelated Articles
EBA Sets Out Roadmap for 2023, Updates Reporting Framework 3.2
The European Banking Authority (EBA) published its work program for 2023 as well as the technical package for phase 3 of version 3.2 of its reporting framework.
FED Announces Launch of Climate Scenario Analysis Exercise in 2023
The Board of Governors of the Federal Reserve System (FED) announced a pilot climate scenario analysis exercise for six largest banks in the U.S.
BIS Paper Studies Impact of Fintech Lending on Small Businesses in US
The Bank for International Settlements (BIS) published a paper that studies impact of fintech lending on credit access for small businesses in U.S.
UK Regulators Issue CRR Changes and Stress Test Scenarios for Banks
The Prudential Regulation Authority (PRA) issued the policy statement PS8/22 to amend the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook and update the supervisory statement SS7/13 titled "Definition of capital (CRR firms).
EBA Launches EU-Wide Transparency Exercise in 2022
The European Banking Authority (EBA) launched the EU-wide transparency exercise for 2022, with results of the exercise expected to be published at the beginning of December, along with the annual Risk Assessment Report.
SRB on CRR Quick-Fix to Policy for Multiple Point of Entry Banks
The Single Resolution Board (SRB) welcomed the adoption of the review of the Capital Requirements Regulation, or CRR, also known as the "CRR quick-fix."
EC Rule Lists Advanced Economies for Market Risk Capital Calculations
The European Commission (EC) recently adopted the Delegated Regulation 2022/1622, which sets out the regulatory technical standards to specify the countries that constitute advanced economies for the purpose of specifying risk-weights for the sensitivities to equity.
EBA Publishes Final Regulatory Standards on STS Securitizations
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying and, where relevant, calibrating the minimum performance-related triggers for simple.
ECB Further Reviews Costs and Benefits Associated with IReF
The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.
EBA Publishes Funding Plans Report, Receives EMAS Certification
The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).
