What BPI is saying: “Banks are essential to a smooth transition to a greener economy by helping their customers across all industries meet their financing needs. To support that transition banks need a flexible, risk-based approach from banking supervisors, as opposed to granular, prescriptive rules,” BPI Senior Vice President and Associate General Counsel Lauren Anderson said.
“It’s essential that regulators take thoughtful, steady steps forward, not over-committing with false precision-based rules at this point. We look forward to working with the Basel Committee and the OCC on these important policy issues.”
Why it matters: The green transition is a huge economic shift. Overly prescriptive rules relating to credit allocation or cost of financing could have unintended consequences for the economy, such as price shocks or shifting carbon-intensive financing outside the banking sector to less regulated players.
Here are the guiding principles BPI supports in the OCC and Basel Committee initiatives.
- Flexibility: Climate-related risks vary across institutions, sectors and timeframes, and therefore banks need flexibility in managing of these risks. Any final guidance or principles should refrain from requiring banks to apply prescriptive quantitative limits or thresholds for climate-related financial risk at this time.
- Risk-based: Regulators should enable banks to tailor their risk management programs to the specific risks they face in line with their client portfolios and geographic exposures.
- Nascent toolkit: The methodologies and data used to measure climate-related financial risks are not fully developed, and this should be reflected in guidance from the regulators.
- Do not shoehorn climate into regulatory stress-testing: The Basel principles need to recognize the crucial difference between regulatory stress testing for capital adequacy and longer-dated, exploratory, climate scenario analysis. Similarly, it would be inappropriate to require banks to integrate climate into existing capital planning frameworks given data and methodological limitations and the mismatch on timeframes.
- Supporting transition: The regulators should acknowledge the benefits and appropriateness of banks helping finance their clients’ low-carbon transition needs. Any final guidance or principles should not inadvertently hinder banks’ abilities to continue financing clients as they adjust their business models.
For more of BPI’s work on climate, see the links below:
- Does CRISK Really Measure Banks’ Exposure to Climate Risk?
- BPI Statement on FSOC Climate Report
- Credit Losses from Declining Industries: Lessons for Climate-risk Modeling
- The FSB’s Climate Roadmap—Are We on the Road to a New International Standard?
- BPI Statement on HFSC Consumer Protection and Financial Institutions Subcommittee Hearing on Climate Risk
- Green Lending: Is Regulatory Exuberance Irrational (and a Little Dangerous)?
- SEC Should Build off its Traditional Disclosure Principles When It Comes to Climate
- Climate Risk and Bank Capital Requirements
- Regulators Ask Banks To Assess Climate-Related Risks From Largest Counterparties, but Data Gaps Persist
- BPI Welcomes Dialogue on Climate-Related Risks as Senate Banking Committee Holds Hearing
- Get the Transition to Green Financing Right
- Climate Risk Test Asks Banks to Look Too Far Down the Road
- Challenges in Stress Testing and Climate Change
About Bank Policy Institute.
The Bank Policy Institute (BPI) is a nonpartisan public policy, research and advocacy group, representing the nation’s leading banks and their customers. Our members include universal banks, regional banks and the major foreign banks doing business in the United States. Collectively, they employ almost 2 million Americans, make nearly half of the nation’s small business loans, and are an engine for financial innovation and economic growth.