FRB Proposes Draft Principles for Large Banks' Management of Climate-related Financial Risks

The Federal Reserve Board ("FRB") requested comment on draft "Principles for Climate-Related Financial Risk Management for Large Financial Institutions". The proposed principles 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 FRB said that the proposed principals are substantially similar to related proposals from the FDIC and the OCC (see here and here).

The draft principles cover the following areas:

• Governance: Banks should take steps to understand the impact of climate-related financial risk to oversee the implementation of the bank's business strategy, risk profile and risk appetite.

• Policies, Procedures and Limits: Bank management "should incorporate climate-related financial risks into policies, procedures, and limits to provide detailed guidance on [the bank's] approach to these risks in line with the strategy and risk appetite set by the board."

• Strategic Planning: Banks "should consider material climate-related financial risk exposures when setting [their] overall business strategy, risk appetite and capital plan." Banks should also consider how climate-related financial risk impacts other operational risks.

• Risk Management: Banks should develop and implement "processes to identify, measure, monitor and control climate-related financial risk exposures within [their] existing risk management framework." Banks should also develop processes to measure material climate-related financial risks and communicate those risks to internal stakeholders.

• Data, Risk Measurement and Reporting: Banks should incorporate climate-related financial risk information into their "internal reporting, monitoring and escalation processes." Management should monitor developments in "data, risk measurement, modeling methodologies and reporting" and incorporate them into climate-related financial risk management.

• Scenario Analysis: Banks should "develop and implement climate-related scenario analysis frameworks in a manner commensurate to [their] size, complexity, business activity and risk profile." Such frameworks should contain "clearly defined objectives that reflect [their] overall climate-related financial risk management strategies."

The FRB also included risk assessment principles to describe how climate-related financial risks can be addressed in various risk categories.

FRB Governor Michelle W. Bowman stated that "it is critical that any final principles complement the existing supervisory framework supporting the safety and soundness of financial institutions." She said that the FRB should "consider the costs and benefits of any new expectations." Ms. Bowman agreed with the exclusion of firms with fewer than $100 billion in assets from the scope of the principles' application "in light of the robust risk management expectations already applicable to such firms."

FRB Governor Christopher J. Waller dissented to the issuance of the proposed principles. Mr. Waller emphasized that he does not view climate change as posing "a serious risk to the safety and soundness of large banks and the financial stability of the United States." Mr. Waller pointed to the FRB's stress test requirements "that impose extremely severe macroeconomic shocks," noting that the stress tests "show that the banks are resilient."

Comments are due within 60 days after the date of publication in the Federal Register.