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The acting chairman of the Federal Deposit Insurance Corp. Martin Gruenberg told bankers that their institutions should not be “entirely dependent” on government financial assistance in the event of severe weather.
In a speech on climate risk at the American Bankers Association’s annual convention in Austin, Texas, Gruenberg stressed the importance for banks to consider the risk posed by increasingly severe weather events. Gruenberg, in his comments, particularly relevant given the damage Hurricane Ian caused to Gulf Coast businesses and communities, said that with government assistance to severe weather events becoming potentially more costly, banks should ” exploring new ways to manage these risks”.
“While current insurance policies may cover some or all of the losses associated with many severe weather events, policies may over time become more expensive or unavailable to cover losses for a geographic area or business activity. particular, particularly if they are faced with the increasing severity and frequency of severe weather events,” he said. severe weather, financial institutions should not be entirely dependent on such assistance, either directly or indirectly.”
The FDIC isn’t going to tell banks which industries they should or shouldn’t consider investing, however, Gruenberg said. Regulators picking industries for special consideration have been a big concern for congressional Republicans, who raised points about it repeatedly during big bank hearings last month on Capitol Hill.
“We will not be involved in determining which companies or sectors financial institutions should do business with,” Gruenberg said. “These types of credit allocation decisions are the responsibility of financial institutions. We want financial institutions to take climate-related financial risks fully into account – as they do for all other risks – and continue to adopt a risk-based approach to evaluating individual credit and investment decisions.”
Gruenberg also touched on one of the industry’s biggest fears about climate risk and how regulators will consider incorporating it into their reviews: scenario analysis. He said the analysis of climate risk scenarios would be aimed at larger institutions, especially those serving multiple communities, rather than smaller ones.
He added that he sees scenario analysis as an “exploratory risk management tool”, rather than a stress test that could have regulatory capital implications.
The Federal Reserve announced last week a climate stress test pilot program with the participation of six US-based global systemically important banks: JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo. The Fed said the program was “exploratory in nature” and would not involve prudential or capital adjustments based on the results.
Moderating more for community banks, Gruenberg said prudential expectations would vary for banks depending on their size.
“Increased exposures and increased uncertainty should not lead to unreasonable expectations from regulators,” he said. “We understand that small and medium banks have limited resources compared to large banks. As in other areas of risk, oversight expectations are tailored based on size, complexity and business operations – we would not expect a community bank to manage credit risk in the same way as a larger institution and we would not expect the same for climate-related financial risk.”