WASHINGTON — It was hailed as a coup when the Federal Reserve announced in December that it was joining a global collective of financial regulators focused on climate change policies. Six months later, other U.S. bank regulators are under increasing pressure to follow suit.
Convened in 2017, the Network for Greening the Financial System has 90 members, including central banks and regulatory agencies that develop policy recommendations for members to combat the financial system threats from a warming climate. It also includes the New York State Department of Financial Services.
Some had complained that the Fed was too slow to join. Critics now say the absence of the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency is conspicuous. While the Fed sets monetary policy and oversees large U.S. bank holding companies, observers note that the OCC regulates the largest U.S. bank subsidiaries and the FDIC is the sole federal agency insuring bank deposits.
"It’s particularly important for regulators who regulate banks and bank holding companies with global operations [to join] because it would be potentially really problematic if those institutions are subject to different sets of rules and different sets of expectations in different countries,” said Erik Gerding, a professor at the University of Colorado Law School, specializing in banking and securities law.
The U.S. regulators are still in the early phases of exploring what threats their institutions face in the coming years from climate change. The Fed is the furthest along, having identified climate change as a risk to financial stability and forming a Supervision Climate Committee and a Financial Stability Climate Committee.
An expanded U.S. presence with the network could accelerate that process. The group’s policy recommendations have included integrating climate risks into financial stability monitoring and supervision, developing climate-related disclosures and incorporating sustainability into regulators’ own portfolio management.
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Some worry that U.S. regulators need to move more aggressively to compel financial institutions to evaluate and act on looming risks from climate change.
“The U.S. is behind,” said David Arkush, a managing director of Public Citizen’s climate program. “There's a risk that U.S. regulators will spend too long studying these issues and potential responses before they act. And that makes it all the more important that they learn as much as they can from other regulators who have already been taking them on.”
Some are hoping the OCC will take a more active role on addressing climate change risks after the Biden administration appointed acting Comptroller Michael Hsu to lead the agency. In a recent statement, Hsu said, "Climate change poses new risks and challenges for banks, and we need to make sure they understand those risks and are capable of managing them.”
"If you get a strong comptroller who is a real climate leader, that's a really important goal, not just in the U.S. but has the potential to be important internationally," Arkush said.
An OCC spokesperson said the agency is exploring whether to join the network, and that Hsu has specifically asked staff to look into it. The FDIC declined to comment for this story.
"While the issue of the potential impact of climate on the financial sector seems to be gaining momentum among domestic and international regulatory bodies, it is worth noting that FDIC supervisors have long expected financial institutions to consider and appropriately address potential climate risks that could arise in their operating environment as a meaningful safety and soundness concern," FDIC Chair Jelena McWilliams said during a meeting in March of the Financial Stability Oversight Council.
McWilliams said FDIC personnel conducts "internal analysis of a range of factors that affect economic and banking conditions, including the potential implications of changing environmental conditions."
"We will continue to engage with other regulatory bodies, domestic and international, on how best to address such risks, and look forward to contributing to interagency work in this area," she said.
Proponents of fuller U.S. involvement with the NGFS argue that the FDIC and OCC have distinct responsibilities from the Fed, and could benefit from learning how other countries are approaching climate risk.
“The Fed can go share information with other regulators, but we still live in a very fragmented bank regulatory system in the country,” said Gerding. “The FDIC is the only regulator that's responsible for deposit insurance, so being able to learn about best practices and share their own experiences with respect to deposit insurance is an important thing. It's not like all of these regulators are essentially the same.”
But not all experts agree that there is a need for the FDIC and the OCC to join the Greening network. With the Fed’s membership, some say, U.S. regulators are already in a strong position to benefit from information-sharing by the network on issues such as best supervisory practices, risk modeling and approaches to data collection.
“The U.S. is well-represented by having the Fed on the NGFS,” said Joe Sergienko, a managing director of the Berkeley Research Group’s financial institution advisory practice. “So I’m not sure that the FDIC and OCC joining the network really moves the needle, from that perspective.“
The U.S. central bank has been more outspoken about addressing the risks that climate change poses to the banking system in recent months, highlighting it as a financial stability concern for the first time in November.
One factor that could have made U.S. regulators more cautious about joining the NGFS and weighing in on climate change issues more generally was the influence of the Trump administration, which pushed back on efforts to combat climate-related risks and had withdrawn the U.S. from the Paris agreement.
Before Hsu's appointment, the heads of the Fed, FDIC and OCC had all taken office during the Trump era.
“Up until recently, both the FDIC and the OCC were led by Trump appointees,” said Aaron Klein, a senior fellow in economic studies at the Brookings Institution. “To me that’s the answer, full stop.”
But some experts say the FDIC and OCC's missions may not be compatible with the global approach of an organization like the Network for Greening the Financial System.
The value of the NGFS is to develop risk modeling around the effects of climate change "on financial stability, which is primarily the purview of the Fed and FSOC,” said Lee Reiners, executive director for Global Financial Markets Center at Duke University. “That’s less relevant and less of a value-add for the FDIC and OCC at this point.”
Still, others point to a core difference between how the U.S. organizes its financial regulators compared to much of the international community.
With three distinct prudential regulators in charge of different, sometimes overlapping parts of the financial system, the Fed ultimately represents only a part of the regulatory community.
“The FDIC and OCC actually have responsibilities as prudential regulators that the Fed doesn't have, or that they share with the Fed on equal footing,” said Arkush. “In most countries, to bring in the full range of their prudential regulation and supervision, you just bring in the central bank. Here, you bring in the central bank, and you bring in the OCC and the FDIC.”
Gerding also argued that joining the coalition doesn’t come with any binding requirements for regulators.
“This is really about learning, and it's about conducting research,” he said. “It's about finding data gaps, and we shouldn't be afraid of that. If there is climate risk for the banking sector, that should be addressed, but it's not preordained that there's going to be a specific kind of risk found or a specific level of risk or a specific tool that will be used.”
Yet any decision by the FDIC and OCC to join the network would certainly be met with pushback.
Republican lawmakers criticized the Fed’s decision to join the consortium and urged the central bank against adopting several policy recommendations the group has made, including conducting climate-related stress tests or scenario analyses.
In a December letter to Fed leaders, 47 GOP lawmakers said the central bank should only endorse network policies "that are in the best interest of our domestic financial system,” would not pose competitive issues for U.S. banks relative to European counterparts and would not harm their customers.
The GOP letter also warned the Fed about climate policies that may “accelerate the ill-advised pattern of ‘de-banking’ legally operating businesses in industries, such as coal and oil and gas, that are politically unpopular to certain vocal policymakers.”
Proponents of greater U.S. involvement in the network say participation by the OCC and the FDIC would be an apolitical move.
“There's this criticism that the federal regulators will be wading into politics, and will be wading into climate policy if they engage on this issue, and that they shouldn't be doing either of those things,” said Arkush. “Responding to substantial risks to the financial system, and responding to risks that financial actors are creating to other institutions, or to the financial system — obviously, those jobs are squarely within the mission of these regulators.”
Neil Haggerty contributed to this article.
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