Financial regulators pressed on climate change focus

Acknowledging that the FDIC does not currently incorporate the financial risk of climate change into its supervisory program, Acting Chairman Martin Gruenberg said today the agency needs to “clearly communicate” what its intentions are as it begins to explore those risks. Gruenberg and other top financial regulatory officials appeared before the House Financial Services Committee for the second of two days of congressional oversight hearings, where they were asked questions on a wide range of issues. Republican lawmakers—who will hold the House majority starting in 2023—were skeptical of climate change initiatives started by the agencies under the Biden administration and pressed the panelists on how those initiatives would be carried out.

“We’re just beginning this process, but from my standpoint, there needs to be active engagement, explain what we’re doing, listen to the industry, and proceed thoughtfully and carefully,” Gruenberg said, adding that “there will be clear distinction in how we approach the larger institutions as opposed to the smaller ones.”

Acting Comptroller of the Currency Michael Hsu acknowledged that community banks have expressed concerns to him about the climate push. However, he also said they were affected by extreme weather events that were growing in frequency and intensity because of climate change. “What we are encouraging when we talk to community banks is that they learn from each other [and]they learn from us. . . . I think it’s fair to say that there’s a lot of learning in general, whether it’s for community banks or for the larger banks, as to how to best approach this.”

Banking outlook

The banking industry reported generally positive results in 2022 amid continued economic uncertainty, but challenges lie ahead, Gruenberg told lawmakers. He noted that loan growth has strengthened, net interest income grew and most asset quality measures improved.

“However, rising interest rates and longer asset maturities also resulted in unrealized losses on investment securities held by banks,” Gruenberg said. “As of the second quarter of 2022, banks reported $470 billion in unrealized losses as the market value securities fell below their book value. There’s a real overhang here for the industry that we need to pay attention to. The FDIC expects this trend to be an ongoing challenge as interest rates continue to rise in the third quarter, especially if banks need to sell investments to meet liquidity needs.”