In the wake of recent climate change guidance issued by federal banking regulators, there is resounding skepticism amongst smaller lenders. The distrust stems from a history of contentious relationships between banks and their Washington supervisors. The guidance, put forth on October 24 by the Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency, is designed to help banks evaluate the material risks linked to climate change, such as physical danger to bank branches and transition risks as the economy steers clear of fossil fuel production.
Despite repeated assertions from regulators that this nonbinding guidance won’t influence credit allocation, including lending to fossil-fuel businesses, smaller banks aren’t convinced it won’t affect them. Many point to the introductory remarks in the guidance which highlight common climate risks for all banks, leading some to fear the guidance could be applied indirectly to smaller lenders.
The skepticism can be traced back to the scars left by Operation Choke Point, an Obama era initiative where the Justice Department alongside federal supervisors allegedly pressured banks into halting lending to certain legal businesses citing reputational risk. This experience underpins the current widespread apprehension over the new climate guidance.
The guidance is expected to assist banks with $100 billion or more in assets to manage the substantial risks to their balance sheets attributable to climate change. Primarily, the focus falls on risk management, especially the credit risks related to loans to fossil fuel industries, and to areas potentially at high risk due to intensified climate change effects.
Despite these clarifications, Republican regulators and bank officials have raised serious objections. Republican members of the FDIC board and two Trump appointees to the Federal Reserve’s board of governors voted against the guidance. Jonathan McKernan, an FDIC board member, argued that the guidance seems intended to get bank regulators involved in pricing and capital allocation.
The Independent Community Bankers of America (ICBA) has aired a statement voicing strong concerns. Even if the guidance is explicitly intended for the 36 banks with more than $100 billion in assets according to available data, the ICBA fears it could also be extended to smaller banks.
The current climate guidance, surprisingly, does not appear to be a cause for concern for larger banks as they are already implementing much of what it urges. It is noteworthy however, that the lack of clear understanding and trust based on historical experiences may exacerbate the fear of the guidance being used to indirectly affect decision-making, particularly amongst smaller lenders.