ABA Raises Concerns Over FRB's Draft Climate Principles

In a comment letter on the FRB's "Principles for Climate-Related Financial Risk Management for Large Financial Institutions," the American Bankers Association supported efforts to create "a high-level guide for the largest institutions," but raised concerns on both substance and process.

Background

As previously covered, the FRB's proposed principles aim to provide banks with "a high-level framework for the safe and sound management of exposures to climate-related financial risks for Board-supervised financial institutions with over $100 billion in assets." The draft principles cover the areas of (i) governance, (ii) policies, procedures and limits, (iii) strategic planning, (iv) risk management, (v) data, risk measurement and reporting, and (vi) scenario analysis. The FRB also included risk assessment principles to describe how climate-related financial risks can be addressed in various risk categories.

Areas of Support

The ABA supported provisions in the FRB's proposed principles, including:

• flexibility in allowing for climate-related financial risks to be incorporated into existing risk types and risk management frameworks; and

• the FRB's acknowledgment that organizations should modify risk-management practices to the "nature, scope, and risk of their activities."

The ABA said that the principles should account for the possibility that climate-risk management practices may "differ not only among supervised organizations, but also within an organization's different operations or lines of business."

Recommended Changes

The ABA outlined reservations on both substance and process, including opposition to:

• provisions that may be interpreted as obligating banks to "adopt lending limits related to climate-related financial risk regardless of materiality";

• overly prescriptive board and management requirements that would obligate boards and management to go beyond their roles on climate risk; and

• the FRB's stated approach that, in measurements and controls, management should include "corresponding measures of conservatism" (i.e., the accounting principle that leans toward worst-case scenarios as opposed to all plausible scenarios, which the ABA said could result in significant differences from the rest of an institution's risk and capital management practices and have other adverse outcomes).

The ABA also called for more clarity with respect to U.S. operations of foreign banking organizations ("FBOs"), and was specifically concerned with FBO governance and the management of risk in the United States.

With respect to process, the ABA raised concerns that the FRB's proposed principles differ from those developed by the FDIC and the OCC. Observing how the FRB's principles align with guidance from the Basel Committee on Banking Supervision that was issued following the FDIC and OCC proposed principles, the ABA urged the agencies to better align their final principles and maintain a "robust and transparent process." In addition, the ABA stated the proposed principles are not appropriate for smaller institutions, and called on the agencies to work together to ensure the final principles do not impact smaller institutions through the supervisory process.