The U.S. Federal Reserve Board’s proposals on climate risk management at large U.S. banks are a positive for the banks, says Moody’s Investors Service in a new report.
The Fed proposed principles earlier this month to manage climate-related financial risks. The proposal addressed governance, strategic planning, data management, reporting and scenario analysis, among other aspects of a proposed framework for large banks (over US$100 billion in assets).
“The draft principles, if implemented, would be credit positive for U.S. banks because they would facilitate a better understanding and integration of climate risk management and the creation of industry-wide best practices,” Moody’s said in its report.
Under the framework, large banks would be expected to assess climate-related risk as part of their credit risk, liquidity risk, other financial risks, operational risk, legal and compliance risk and other non-financial risk, it said.
“Given the significance of credit risk for banks, the proposal would instruct banks to consider climate-related risk in underwriting and portfolio monitoring, including concentration analyses that look at sector and geography, as well as assess correlations across exposures or asset classes. Importantly, the proposal would instruct banks to determine credit risk tolerances and lending limits related to these risks,” Moody’s said.
While the big banks are starting to integrate climate risk considerations into their governance, strategic planning and risk management frameworks, Moody’s said that industry-wide risk management tools and metrics are just starting to be developed.
“Regulatory focus on climate risk management is likely to promote the development of such tools, although not a panacea for all the challenges inherent in developing effective climate risk management,” it said.
It also noted that two Fed governors issued written statements suggesting the proposals “might not have their full support.”
That said, the other U.S. banking regulators — the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency — have previously issued similar proposals.
“The general consistency in proposed climate risk principles illustrates alignment between the federal banking regulators,” Moody’s noted.
Additionally, the U.S. Securities and Exchange Commission has issued disclosure proposals that would require issuers, including the publicly traded banks, to report on the governance and management of climate-related risks and emissions data.