A river overflows its banks in Northern Nova Scotia

U.S. banking regulators are proposing principles for dealing with climate-related financial risks.

The U.S. Federal Reserve Board called for comment today on proposed principles for managing climate-related financial risks at large banks (specifically, banks with over US$100 billion in total assets).

“The financial impacts that result from the economic effects of climate change pose an emerging risk to the safety and soundness of banking organizations and the financial stability of the United States,” the Fed noted.

The proposed principles cover both the physical risks and the transition risks of climate change, and the threat of them materializing as credit, market, liquidity, operational and legal risks for banks.

“For example, chronic flooding or wildfires may pose a risk to the value of the collateral that a banking organization has taken as security against its loans,” the Fed said in its notice.

“Technological innovations in the production, storage, and transport of energy could decrease the value of assets dependent on older technologies, resulting in mark-to-market losses on a banking organization’s trading portfolios or reduced cash flow of certain borrowers,” it added.

Ultimately, weaknesses in banks’ treatment of climate-related risks could adversely affect their safety and soundness, the Fed noted.

The principles, which focus on six areas: governance; policies and procedures; strategic planning; risk management; data and reporting; and scenario analysis — are in line with similar proposals from the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) that were issued earlier this year.

The Fed said that it developed its draft principles in consultation with the OCC and the FDIC, and that the agencies will work together to finalize guidance to ensure consistency in this area.

The proposals are now out for a 60-day comment period.