For years, big banks have poured money into risky fossil fuel investments, ignoring the growing impacts of climate change and threatening the savings of everyday Americans. But now, three major banking regulators have finally taken important first steps to address the climate crisis by announcing new pilot projects and releasing new recommendations for banks on climate risk.
Earlier this year, the Office of the Comptroller of the Currency (OCC) and Federal Depository Insurance Corporation (FDIC) issued guidance detailing their expectations for how big banks must respond to climate risks. And just last week, the Federal Reserve – the country’s most powerful financial regulator – signaled its intention to require financial institutions to assess climate risks.
As the US grapples with another summer of extreme weather — soaring temperatures, intense droughts, scorching wildfires, and flash floods — it’s becoming increasingly urgent for our financial regulators to use their authority to adequately prepare for the ways the climate crisis will threaten our financial system.
Taken together, these moves by our country’s most powerful financial regulators are a promising starting point in the urgent effort to rein in Wall Street’s harmful practices that are driving climate change and destabilizing our economy.
Federal Reserve pilot project
As America’s central bank and most powerful financial regulator, the Federal Reserve is responsible for fighting inflation, promoting full employment, and keeping our financial system stable. The agency also has a legal mandate to respond to emerging threats, like climate change, that could have severe impacts on the stability of our financial system if left unchecked.
Earlier this month, the Federal Reserve announced plans to launch a pilot exercise in 2023 aimed at helping major banks gain a better understanding of the risks posed by climate change. Importantly, the program would likely require firms to assess how climate shocks would impact their operations and portfolios. The agency also plans to join the Principles for Climate Risk Management for Large Banks, which were issued by the OCC and FDIC.
This announcement is a major step forward, and sends an important signal to banks that they will soon need to start taking climate risk seriously. It is welcome news – though long overdue – that the Federal Reserve will finally begin work to hold banks accountable for their climate impacts, and curb Wall Street's most dangerous and reckless behavior.
OCC and FDIC guidance
Similar to the Federal Reserve, the OCC and FDIC are also responsible for providing guidance to financial institutions in order to keep our financial system stable. The OCC regulates and supervises national banks and federal savings associations, and the FDIC does the important work of protecting money placed in insured banks in the unlikely event of a bank failure.
Earlier this year, the OCC and FDIC issued guidance requiring banks to plan for the long-term impacts of climate change, instead of only focusing on short-term profits. The guidance also tells banks that they cannot greenwash: if they announce climate goals, like net zero by 2050, they need to follow through. They won’t be able to continue business as usual.
This new guidance provides high-level principles to get banks to start taking climate-related financial risk seriously. It is a major milestone in protecting financially vulnerable communities, banks, and the broader financial system from the effects of climate change.
Next steps for the Federal Reserve
The Federal Reserve’s announcement is a promising sign the agency will finally begin taking steps to address climate risk. Climate impacts already affects the economy, financial institutions, and the financial system, and without bold, immediate intervention, things are only going to get worse.
The Federal Reserve must be proactive and assertive in using all of the regulatory tools at its disposal to improve the resilience of the financial system, discourage investments in risky fossil fuels, and require banks to align investments with science-based emissions targets.
The agency already uses stress tests to assess how banks would fare under conditions of economic stress. Now it must include climate considerations in these stress tests in order to understand and strengthen banks’ resilience to emerging climate shocks. It should also impose higher capital requirements for riskier, high-carbon assets in order to disincentivize financial institutions from making these kinds of investments.
- To read more about what the Federal Reserve and other financial regulators can do about climate change, read: Financial Regulators Finally Recognised the Risk that the Climate Crisis Poses to Our Economy. Now What?
Preventing another crash
In 2008, regulators failed to prevent the careless and risky behavior of Wall Street’s biggest banks. The resulting crash tanked our economy and left the most vulnerable people to pay the biggest price. We know that the severity of the 2008 crash was a product of lax oversight of risky bank activities.
Now, we’re watching it all happen again. Big banks continue to make risky investments in fossil fuels for short-term gain, without considering the consequences of climate change. To protect our pocketbooks from the impacts of climate change, federal regulators must learn the lessons from 2008 to proactively address climate risks — before it's too late.
With the clean energy transition already underway in the US, our federal regulators have a major opportunity in front of them to begin fulfilling their mandate to protect our economy from climate-related risks and ensure Wall Street giants aren't gambling with our country’s financial stability.