Basel Committee finalizes principles for managing climate-related financial risks

The Basel Committee on Banking Supervision yesterday issued a final set of principles in its consultation on the effective management and supervision of climate-related financial risks by large, globally active banks. The FDIC and OCC issued virtually identical principles earlier this year, with the Fed expected to follow shortly.

The document includes 18 high-level principles—12 of which provide banks with guidance, while the rest are intended for prudential supervisors. Among other things, the bank-related principles address how banks should incorporate climate-related financial risk in their overall risk framework, including corporate governance, internal controls, and capital and liquidity adequacy.

The principles were not substantially changed from the earlier version released for public comment in November 2021. The committee did make some ABA-recommended clarifications with respect to the roles of board and senior management and added a new term—“climate-related financial risks – measurement methodologies”—to help clarify and differentiate between “stress testing” and “scenario analysis.” The committee also added language emphasizing that capital and liquidity planning incorporate physical and transition risks “that are relevant to a bank’s business model, exposure profile and business strategy, and are assessed as material over relevant time horizons.”

In its comment letter, ABA had warned that “certain principles and supporting text in the consultation are overly prescriptive and assume a level of analytical sophistication that is challenging.” While the Basel committee’s consultations still have to be implemented in the U.S., they represent consensus views among country-level bank regulators and thus serve as the basis for future rulemakings by regulatory agencies.


About Author

Evan Sparks is editor-in-chief of the ABA Banking Journal and senior vice president for member communications at the American Bankers Association.