The FED unveils climate risk management framework for banks, and more

The U.S. Federal Reserve (Fed) Board invites public comment a series of proposed principles for large banks with over $100 billion in assets to mange and monitor climate-related risk and supporting banks’ efforts to incorporate climate-related financial risks into their broader risk management frameworks.

In its proposals, the Fed said that the guidance comes as “the financial impacts that result from the economic effects of climate change and the transition to a lower carbon economy pose an emerging risk to the safety and soundness of financial institutions and the financial stability.”

The effects of climate change can manifest as traditional microprudential risks. 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. 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.

The proposed principles would cover six areas:

• governance

• policies, procedures and limits

• strategic planning

• risk management

• data, risk measurement and reporting; and

• scenario analysis.

The principles also describe how climate-related financial risks can be addressed in specific prudential risk areas including:

• credit

• liquidity

• other financial risks

• operational

• legal / compliance, and

• other non-financial risks

Click on the image below to read more, post from December 2, 2022. Comments will be accepted for 60 days.