WASHINGTON — A push from progressives to have federal bank regulators rely more heavily on supervisory tools and guidance to address the risks of climate change in the banking system could accelerate the government’s response to the slow-moving crisis, but analysts warn the approach may lack accountability and long-term sustainability.
In a report
“Supervisory oversight of a bank’s safety and soundness is a tool flexible enough to help guard against emerging risks like climate change,” wrote Yevgeny Shrago, a policy director at Public Citizen, and David Arkush, managing director of the nonprofit’s climate program. “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.”
The paper from Shrago and Arkush stresses the “flexibility” of supervisory guidance as a tool against climate risk in the financial system. While regulatory actions like rulemakings and enforcement are subject to procedural hurdles and can take months or years to complete, agency guidance evaluating a bank’s preparedness for the risks of climate change or the methods that banks themselves use to evaluate climate risk could be implemented relatively quickly by agency examiners.
“The value of using supervision to address climate risk lies in part in its informal and confidential nature. Regulators can effectively use supervision to quickly direct banks away from excessive climate-related risks, without the delays and political compromises inherent in legislation, rulemaking, or enforcement litigation,” the authors wrote.
Shrago and Arkush point to role that bank regulators’ guidance played in the industry’s
Much of the conversation in Washington about climate risk within the financial system has focused on the ambiguities of climate-based financial risk and the lack of reliable benchmarks that regulators and financial institutions can use in order to make meaningful progress. Shrago and Arkush argue that the lack of data is a poor excuse for regulatory inaction.
“Instead of allowing the uncertainty or complexity of climate-related risks to deter them from acting, banks must adopt new risk-management approaches,” the authors wrote. “The magnitude of the threats is too great to ignore them simply because they are complex.”
Under Biden, the federal bank regulators have directed considerable attention to the financial risks of climate change. Both the
At the Financial Stability Oversight Council, made up of a group of banking regulators and led by Treasury Secretary Janet Yellen, regulators published a
But it’s unclear just how aggressive the bank regulators want to be in compelling banks to address climate risks. Analysts say that while guidance can be an important tool for banks and regulators alike, particularly when tackling novel risks to the financial system, it isn’t a good tool for setting rules of the road.
“Supervisory guidance is helpful for financial institutions to interpret the ways that regulators will require them to have certain systems, processes, and ways in which they will comply with expectations from the regulator,” said Peter Dugas, executive director at Capco and a former Treasury Department official, who spoke to American Banker before the report’s publication.
“But without regulation, which are the true rules in which the regulators administer the law,” Dugas said, guidance “only fills a narrow part of the ways in which a financial institution could address something — especially something as unknown as climate change risk.”
Supervisory guidance can also be immediately canceled with a change in administration, Dugas said.
“At the end of the day, unless there is a rule, there is going to be an easy way for another administration to reverse that,” he said.
The broader banking industry is also unlikely to show much support for a guidance-heavy approach to make their business more resistant to climate change and its economic impacts. Unlike proposed regulations that invite public feedback or enforcement penalties that can be appealed, supervisory guidance often occurs away from public view and in a confidential manner.
“There's a reason that there's an Administrative Procedure Act, notice and comment rulemaking,” said Cliff Stanford, a partner at Alston & Bird. “There's a line at which it is inappropriate to have supervisors to issue guidance that has the force of law.”
And while granting federal bank regulators a wide degree of flexibility to tackle pressing and near-term issues like the transition from Libor is one matter, “climate feels like one that is big and long-term,” Stanford said. “If the tools as promoted by this report are used in the way that this report advocates for, it’s likely to push up against that line.”
At the same time, other progressives who support the use of supervisory guidance to combat climate risk and other emerging threats to the financial system say that it would be a mistake to assume that such guidelines and recommendations would emerge without buy-in from the broader agency, particularly agency heads.
“We're not talking just about examiners doing whatever they want without oversight from inside the agency,” said Todd Phillips, director of financial regulation at the Center for American Progress. “You're going to have the political appointees at the agencies, or the deputies, the heads of supervision at the agencies, issuing guidance and explaining how the agencies are thinking about climate risks.”
“Banking is very risky and has such huge consequences when it goes wrong, we really want to give examiners the flexibility to be able to stop banks from engaging in risky activities quickly,” Phillips said. “If regulators have to go through a whole long notice and comment process for every single unsafe and unsound activity, it can sometimes be too late.”
