FDIC’s Gruenberg addresses evolving climate change risk for banks and regulators

Banks have managed weather-related events and risks well, but things are changing and regulators and banks—particularly small and midsize institutions—will need to adapt, was the message this morning from Acting FDIC Chairman Martin Gruenberg during the American Bankers Association’s Annual Convention in Austin, Texas. “As an initial step, boards of directors and senior management may wish to seek a better understanding about how climate change and climate-related financial risk are impacting the institution’s business, customers and communities, and how this risk may evolve over time,” he said.

In particular, banks “may wish to consider developing appropriate sound governance frameworks and processes that have the capability for incorporating the assessment and management of climate-related financial risk as appropriate to their size, complexity and risk profile,” Gruenberg said. “The FDIC views strong corporate governance as the foundation for safe-and-sound operations. . . . Building this internal infrastructure and leveraging these processes early will assist institutions with prudently managing unforeseen climate-related shocks, as well as any potential gradual cumulative impacts of climate-related financial risk.

Changing climate risks will “challenge the future resiliency of the financial system and, in some circumstances, may pose safety and soundness risks to individual banks,” Gruenberg said. He emphasized, however, that the FDIC is not responsible for climate policy and “will not be involved in determining which firms or sectors financial institutions should do business with. These types of credit allocation decisions are responsibilities of financial institutions.”

Gruenberg noted that climate risk supervision is new territory for the FDIC, and that his agency would “continue to expand its efforts to address climate-related financial risks through a thoughtful and measured approach” and that the FDIC would “appropriately tailor any future supervisory expectations to reflect differences in financial institutions’ circumstances, such as complexity of operations and business models.”

During a question-and-answer session with ABA President and CEO Rob Nichols, Gruenberg discussed the proposed plans to recapitalize the Deposit Insurance Fund and corresponding increase in assessments. He explained the FDIC’s obligation to restore the fund’s reserve ratio to 1.35% within eight years and noted the historic surge in insured deposits—including over 4% over the last four quarters (through second quarter 2022).

In response to Nichols’ observation that insured deposits declined in the second quarter, Gruenberg said that insured deposit growth is typically weak or even negative in second quarters, so there is no clear evidence of slowdown at this time and resilient insured deposit growth could continue. Gruenberg said that the banking industry and economy are particularly strong at present and warned of the danger in delaying an increase in assessments until a time when that is not the case. He conceded that this is a difficult issue for which the FDIC is considering all the input submitted in response to the proposal. He said the FDIC board could consider a smaller add-on than two basis points.