FSOC: Climate Risk Tops Financial Stability Priorities

Climate-related risks rank among the top priorities for the Financial Stability Oversight Council, according to the FSOC annual report released today. “In assessing the risks to the financial system, this year the Council has focused on financial risks related to climate change,” the report said. The report—which followed FSOC recommendations in October—highlighted both the physical risks to institutions and collateral associated with weather patterns, natural disasters and climate conditions, as well as the transition risk associated with shifts to new technologies or changes in public policy.

Other risk priorities include elevated corporate debt, vulnerabilities in short-term wholesale funding markets, real estate and the transition away from Libor, FSOC said. While noting that financial conditions have normalized since 2020, prior to the availability of COVID vaccines and therapies, FSOC said that “risks to U.S. financial stability today are elevated compared to before the pandemic” and that “the outlook for global growth is characterized by elevated uncertainty, with the potential for continued volatility and unevenness of growth across countries and sectors.”

While the FSOC report highlighted three key risks associated with the reference rate transition—the selection of alternative rates, institutions’ potential use of Libor after its pending cessation and exposure to legacy Libor-referencing contracts without robust fallback provisions—FDIC Chairman Jelena McWilliams noted that banks’ transition is progressing well. “Banks are also dealing with the challenges of legacy contracts and making adequate preparations for Libor’s discontinuation,” said McWilliams, an FSOC member, in statement today. “We have not noted significant outliers among FDIC-supervised institutions.”

“We have found that many FDIC-supervised institutions, particularly smaller community banks, do not have material Libor exposures,” McWilliams added. “Institutions that do generally have made concerted efforts to transition away from Libor and are on track to issue new contracts in another reference rate by year-end.”