Earlier in 2022, the FDIC announced draft Climate-Related Risk management principles for larger financial institution ($100 Billion + in assets). On October 3, 2022, acting FDIC chairman Martin Gruenberg spoke at the American Bankers annual conference. The title of his speech was The Financial Risks of Climate Change. https://www.fdic.gov/news/speeches/2022/spoct0322.html
Chairman Gruenberg reviewed the evolving expectations for climate risk management as it relates to the institutions the FDIC regulates. While expectations for community and mid-sized financial institutions will not mirror larger, more complex institutions, community and mid-sized institutions should take note of the direction and expectations set for larger institutions as they begin to build and launch their own programs.
The following three points offer focus on where the FDIC is Climate-Related risk management practices are heading:
- FDIC regulated institutions should not be overly reliant on insurance policies and government assistance to provide support at the time of and post climate event.
- Community and mid-sized institutions need to better understand their unique exposure, financial risk, and impact of a climate-related event on their institution.
- The FDIC does not view Climate-Risk scenario analysis as a stress-test, instead considering it scenario planning. “Scenario analysis is not a stress testing exercise and will not have regulatory capital implications.”
Key Takeaways for Community and mid-sized banks
Institutions should consider how climate-related risks impact their business activities. Even if the institution determines that the risk is immaterial, proof that an analysis was completed will be demanded by the regulators for review.
Financial institutions should be prepared to face push-back by the regulators. The How and Why a bank arrived at a risk management determination will be requested. Do policies, procedures and other forms of documentation exist to support the outcome that the institution arrived at? Show your work.
Climate-related financial risks are not going away; they are going to continue to evolve and mature. Institutions need to remain educated and poised to respond accordingly.
What happens next?
Fortrex Technologies is encouraging all our clients to begin (if they haven’t already) and continue to monitor this risk space. Start building out the Climate-Risk Management program now. Socialization of Climate-Risk Management across the institution will aid all levels of staff to best understand their individual role in support the program.
By starting with a few basics, the institution can grow and evolve as the regulatory demands and expectations grow and evolve. Each institution is distinct and will comply in a manner that is best suited to their organization
Should you wish to learn more about Climate Risk or other non-financial risk programs, please contact to Fortrex Technologies for a no obligation conversation. The first task is to get started in a thoughtful and knowledgeable way. Education is your key to success.