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Congressional
Research Servkc
How Do Bank Regulators Treat Climate
Change Risks?
November 25, 2020
Introduction
Potential risks to the financial system from climate change have attracted growing attention in
government, academia, and media, raising questions about the roles of c entral banks and bank regulators
in addressing such risks. The U.S. centralbank, the Federal Reserve (Fed), has responsibilities involving
financial stability, monetary policy, and banking supervision. Climate change-defined in a November 9,
2020, Fed report as the trend toward higher average global temperatures and accompanying
environmental shifts such as rising sea levels and more severe weather events-may impact each of
these. This could occur either through physical risks, such as greater storms and wildfires, or through
transition risk, meaning the risk that changed government policies or market perceptions might lead to
sudden asset price drops, such as for carbon-emitting industries. The Fed report on financial stability
warned that sudden hazards can bring about direct losses that could negatively impact banks' investments.
It asserted that even slowly developing hazards such as rising sea levels could lead to sudden price drops
for bank investments if abrupt changes in public perceptions about such risks emerges. This Insight
focuses on the central bank's role in banking supervision and climate change risks and on what the Fed
and other banking regulators have done to address such risks.
Reliance on Existing Broad Guidance
Federal Reserve Board Chair Jerome Powell outlined in an April 2019 response to a congressional request
that the Fed based its assessment of lending risks from climate-related events on a broader 1996
supervisory guidance and additional 1996 supervisory letter:
[T]he Board issued supervisory guidance in 1996, to ensure that bank management takes into
account all relevant risks in their underwriting and review practices. Our guidance with respect to
credit underwriting andas set quality provides supervisors the flexibility neces saryto address risks
from s evere weather events. In addition, our guidance also specifically addresses lendingto s ectors
where assessments ofthese risks are critical for due diligence andunderwriting.
Congressional Research Service
https://crsreports.congress.gov
IN11545
CRS NS GHT
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