Regulators: It’s Time to Protect Our Financial System from the Effects of Climate Change

New report from the Roosevelt Institute and Public Citizen argues for immediate deployment of banking supervision to appropriately respond to climate-related financial risk.

June 6, 2022
Alice Janigro
(202) 412-4270

NEW YORK, NY — The physical damage of climate change is already threatening banks’ assets and operations, and according to the latest assessment of the Intergovernmental Panel on Climate Change, these effects will only get worse. Yet, as recently highlighted by the ongoing debate around the role of the Federal Reserve in addressing the climate crisis, the United States government and regulators have not yet reckoned with the financial risks we face both from a warming planet and our not-yet-realized clean energy transition. The 2008 recession demonstrated what happens when regulators don’t sufficiently assess and respond to financial risk. The only responsible path forward to avoid another predictable financial crisis requires immediate action from regulators.

Looking over the Horizon: The Case for Prioritizing Climate-Related Risk Supervision of Banks, a new report from the Roosevelt Institute and Public Citizen, explains how banking regulators tasked with supervisory oversight—the process of assessing and addressing the risks threatening banks’ success—are particularly well situated to jump-start this process. Authored by David Arkush (Roosevelt Institute fellow and managing director of Public Citizen’s climate program) and Yevgeny Shrago (policy director of Public Citizen’s climate program), the report offers a blueprint for regulators to thoughtfully integrate climate risk into their supervisory guidance and examinations for banks.

“Banking supervision is a uniquely flexible tool at regulators’ disposal for immediate action to begin addressing climate-related threats,” Arkush and Shrago explain. “In supervisory oversight, regulators can take an iterative approach in assessing and mitigating risk that accounts for the scale and unpredictability of the climate crisis.”

After explaining the use of banking supervision, Arkush and Shrago go on to: 

  • Provide guiding principles to ensure that the supervision process appropriately and equitably addresses the unique challenges of climate-related risk;
  • Identify precedents for banking supervisors taking on risks that have features in common with climate-related risks; and
  • Give recommendations for how regulating bodies, including the Office of the Comptroller of the Currency’s guidance, the Federal Deposit Insurance Corporation, and the Federal Reserve, should proceed in establishing clear expectations for banks.

This report builds on Arkush’s previous Roosevelt report, Unsafe at Any Charge: Why Financial Regulators Should Actively Mitigate Climate-Related Risk, which made the broader case for regulators to take action in addressing climate-related risk. Since then, the Financial Stability Oversight Council has confirmed the US’s lack of progress on this issue.