Banking Agencies—but Not the NCUA—Are Collaborating on Climate Issues

NCUA yet to push for tougher environmental stance despite agency report outlining risks to credit union system.

Several federal banking agencies—but not the NCUA—are collaborating on climate-related guidance to be issued to the largest financial institutions under their supervision, a committee of the Financial Stability Oversight Council (FSOC) revealed last week.

The OCC, FDIC and the Federal Reserve “have indicated their intention to work together to promote consistency in the supervision of large banks through final interagency guidance, after carefully reviewing comments received,” FSOC’s Climate-related Financial Risk Committee said, in a report.

That report follows one issued in July by the Ceres Accelerator for Sustainable Capital Markets that found the NCUA is behind other banking agencies in evaluating the potential risks climate change poses to the financial system.

Where Things Currently Stand at the NCUA

The NCUA has solicited public comment on how climate issues may affect the safety and soundness of credit unions.

NCUA Chairman Todd Harper, an FSOC member, has said that climate change poses a systemic risk to the financial system. However, the NCUA board’s two Republican members, Kyle Hauptman and Rodney Hood, have said the NCUA should leave it up to credit unions to address the issue.

However, Hood’s term on the board expires this month, and it is likely that President Biden will nominate a Democrat to replace him. That would give the Democrats the majority of members on the agency board and allow Harper to push a tougher stance on the issue.

At a recent meeting of the International Credit Union Regulators’ Network, Harper acknowledged that the U.S. is behind other nations in assessing the risks posed by climate change.

“Regulators and insurers of federal financial institutions, like the NCUA and those in this room, have a duty to ensure the institutions they oversee remain resilient against all material risks including financial risks due to climate-related events,” he said, in a speech.

Inside the FSOC Report

The FSOC committee said that gaps in data may underestimate the impact of climate change.

“Monitoring the potential effects that climate-related financial risk drivers may have on the financial system requires a broad understanding of the transmission channels and risk amplifiers,” the report states.

“As agencies seek to build this understanding and incorporate climate-related financial risks into a risk-monitoring framework, they face challenges related to data gaps and fragmentation, inconsistencies in measurement techniques and assumptions, and a paucity of academic research exploring the financial stability implications of climate-related financial risks,” the panel added.

The report noted further that given the critical role of real estate in the economy, the intersection of physical risk, real estate and insurance has emerged as a particular priority.

The climate committee said a working group is developing a risk framework to identify and assess climate-related financial risk, adding that despite progress, challenges remain, and risk indicators are in early development.

Fed Report

In a separate report issued Thursday, the Fed’s Inspector General said the agency is piloting a climate scenario analysis exercise this year—the first U.S. financial regulator to conduct such an initiative.

The exercise includes six of the nation’s largest banks. However, the IG warns that regional and community banks are more vulnerable to regionally concentrated physical risks, such as extreme weather-related events.

“A Board official stated that because smaller institutions pose less risk to the nation’s financial system, it is appropriate for the Board to be risk focused and prioritize addressing climate risk at the largest institutions,” the report reads.

Earlier this year, the NCUA’s chief economist reported that one quarter of all federally insured credit unions are in communities that have a relatively high or very high risk of experiencing the negative effects of natural hazards.