US banking regulators withdraw climate risk principles

US federal bank regulators have withdrawn a framework to help large banks manage their climate risk, saying existing standards already take risk into account. However, critics say the decision is politically motivated.

The joint statement from the US Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency announced that they were withdrawing from the principles governing climate-related financial risk management for large financial institutions which were first issued in 2023.

“All supervised institutions are expected to consider and appropriately address all material financial risks and should be resilient to a range of risks, including emerging risks,” the statement says.

The withdrawal is just the latest move by US federal agencies since the start of President Donald Trump’s second term to downplay climate change and reverse course from the direction taken by the previous administration.

When the principles were first announced, Fed chair Jerome Powell said “banks need to understand, and appropriately manage, their material risks, including the financial risks of climate change”.

While Powell has said the regulator is not a “climate policymaker”, he noted that the climate risk management framework was focused on risk management which falls within the remit of the central bank.

Five of the seven Fed board members approved the withdrawal. Governor Michael Barr, who voted against withdrawing the guidelines, said in a statement that the board’s decision “defies logic and sound risk management practices” and warned it would “make the financial system riskier even as climate-related financial risks grow”.

“The rescission contains literally no evidence to support taking this step only two years after putting the principles into effect. We owe the public a rational, evidence-based explanation for our actions, and this rescission fails that test,” Barr states.

When the guidelines were created, they went through a one-year comment period with feedback from various agencies, as well as public letters of support.

Other experts have also stated that considering climate risk and their impacts are well within the mandates of central banks. Kevin Stiroh, former chair of the Fed’s supervision climate committee, told Green Central Banking that if climate change has a material impact, then it is a risk that should be managed.

The agencies’ decision is a “politically motivated move in the wrong direction” and puts the US banking system at risk, said Elyse Schupak, policy advocate at Public Citizen.

“The increase in the frequency and severity of climate disasters and the rapidly escalating property insurance crisis mean the agencies should be working harder to understand and mitigate climate-related financial risks faced by banks and the financial system, not backtracking,” she said.

Jessye Waxman, campaign advisor at the Sierra Club, noted that economists have warned the financial impact from climate change could be as bad as the Great Depression but permanent.

“Fed chair Powell oversaw the adoption and now the rescission of this guidance just two years later. The science hasn’t changed, the risks have only worsened and the best practices for banks are clearer than ever. The only relevant change is the administration in power, which shows that this reversal is a purely political move”.