Reports Climate and Economic Transformation

Looking over the Horizon: The Case for Prioritizing Climate-Related Risk Supervision of Banks

June 6, 2022

By Yevgeny Shrago, David Arkush

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The climate crisis is creating financial risks that banks and their regulators must address. These take the form of both physical risks—extreme temperatures, wildfires, human migration—and transition risks—the threat that stranded fossil fuel assets will pose to the financial system during a rapid transition. Regulators must take immediate action in order to minimize both threats to financial stability.


In Looking over the Horizon: The Case for Prioritizing Climate-Related Risk Supervision of Banks, Yevgeny Shrago and David Arkush argue that supervisory oversight of a bank’s safety and soundness is a tool flexible enough to help guard against emerging financial risks posed by climate change—one that can be utilized quickly. Because supervisory guidance is not the product of a formal rulemaking process, it can be deployed with limited administrative delays and avoid pitfalls that impede many legislative and regulatory efforts. 

In their report, Shrago and Arkush:

  • Provide guiding principles to ensure that the supervision process appropriately and equitably addresses the unique challenges of climate-related risk;
  • Offer ways for banks to incorporate new risk management approaches into their current structures and across all levels of business;
  • Demonstrate that regulators already possess the expertise and practice needed to immediately begin implementing these principles; and
  • Provide recommendations for how regulating bodies, including the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve, should proceed in establishing clear expectations for banks.

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