Washington, D.C. — In 2022 alone, 18 different billion-dollar weather and climate disasters struck and caused almost $170 billion in damages to communities across the United States. A new CAP report calls on U.S. regulators to strengthen support for community and regional banks to adapt to climate-related risks. Recent actions by regulators have focused primarily on supporting the largest banks in managing climate-related risks. However, many community and regional banks likely face greater climate-related risks from natural disasters given their primarily localized loans and services, as well as more limited institutional capacity to address such risks.
Community and regional institutions keep local economies humming. After the recent collapse of three medium-size banks—Silvergate, Silicon Valley, and Signature—there is increased attention on the way smaller financial institutions manage risks and the role the federal government plays in supporting these institutions before a crisis emerges. This CAP report argues that climate change poses a significant risk to individual financial institutions and to the banking system as a whole, and calls on U.S. regulators to apply three mutually reinforcing safety and soundness tools. The three tools recommended in the report are:
- Supervision and supervisory guidance: Supervisory actions that regulators should take to help small and medium-size banks understand and address climate-related risks include issuing guidance and preliminary expectations, incorporating climate-related risks into CAMELS ratings, and training bank examiners.
- Climate-related disclosures in call reports: Over time, regulators should begin requiring banks to publicly disclose information related to climate-related financial risks.
- Climate scenario analysis: Regulators should learn from climate scenario analyses conducted on the largest banks to begin adapting lessons to support smaller institutions.
“To date, banking regulators have been primarily focused on addressing the climate risks facing just large banks, yet community and regional banks often face the most harm from natural disasters,” said Lilith Fellowes-Granda, senior policy analyst at CAP and co-author of the report. “Taking action now can help minimize climate-related financial risks, help prevent financial distress in the future, and ensure that these institutions continue serving U.S. households and businesses.”
“Community and regional banks are essential for rural and local economies,” said Crystal Weise, research associate at CAP and co-author of the report. “Federal regulators have a responsibility to ensure that these smaller institutions and their customers are not left behind as the United States addresses climate change and transitions to a green economy.”
Read the report: “How U.S. Regulators Can Help Community and Regional Banks Address Climate-Related Financial Risks” by Lilith Fellowes-Granda and Crystal Weise
For more information on this topic or to speak with an expert, please contact Sarah Nadeau at [email protected].