‘Prudence demands we act’: Bank regulators unveil climate rules

By Avery Ellfeldt | 10/25/2023 06:36 AM EDT

Regulators will offer banks incentives to help “redlined” communities weather climate-fueled disasters, potentially spurring billions of dollars in investment.

FDIC board of directors Chair Martin Gruenberg testifies March 29 before the House Financial Services Committee.

FDIC board of directors Chair Martin Gruenberg testifies March 29 before the House Financial Services Committee. Andrew Harnik/AP

U.S. banks will face pressure to address the financial threats of climate change — including in underserved communities — under two new sweeping regulatory actions.

The actions, unveiled Tuesday by federal banking regulators, aim to accomplish two separate but related goals.

A final rule includes a provision that explicitly incentivizes banks to help “redlined” communities weather climate-fueled disasters, potentially spurring billions of dollars in investment in everything from flood control systems to sea walls. New guidance, meanwhile, sets regulatory expectations for how large banks should measure and address their exposure to climate-related financial risk.


“We should not wait for a disaster to strike before we act,” Michael Hsu, the acting comptroller of the currency, said Tuesday. “Prudence demands we act as risks emerge.”

The move comes amid fierce Republican pushback against federal efforts to address the financial threats of climate change. Republican lawmakers and officials around the country in recent years have targeted financial regulators specifically, arguing that their attention to climate risk is inappropriate — and an effort to de-bank the fossil fuel industry.

Climate finance advocates, for their part, welcomed both moves as positive steps toward promoting climate-related investment and risk management. But they also said the final rules come up short in a few places, including failing to limit banks’ contributions to rising global temperatures.

It is “disappointing that regulators missed a key opportunity to mitigate climate risk and discourage financing for the polluting industries devastating the climate and our country’s most vulnerable communities,” Adele Shraiman, a climate finance advocate with the Sierra Club, said in a statement.

Updates to anti-redlining law

Broadly, the new rule will overhaul the Community Reinvestment Act, a law Congress passed in the 1970s amid discrimination against low-income households and communities of color by government housing programs and private banks.

The CRA aims to eliminate that practice — known as redlining — and remedy its harmful impacts by requiring financial regulators to assess whether banks are actually providing loans to all communities, regardless of race or income, in the areas where they have branches. Those assessments are used in various decisions; regulators consider them, for instance, when banks apply to merge with another institution or to open a new branch.

The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. — which together released the final rule — said it will modernize the CRA, which hasn’t been updated in nearly three decades.

“CRA seeks to address one of the most intractable challenges of our financial markets; access to credit, investment and basic banking service for low and moderate income communities, both urban and rural,” FDIC Chair Martin Gruenberg said Tuesday.

The agencies said the central goal with the updated rule — which runs nearly 1,500 pages — is to account for major shifts in the banking sector since it was last updated in 1995 as well as to make CRA requirements more rigorous.

The final version does so in a range of ways, including expanding fair lending requirements beyond a bank’s branch networks to areas where it has a concentration of mortgage and small business loans. That provision is meant to account for the reality that banks now do much of their business online, far away from physical branches.

But regulators also account for climate-fueled natural disasters and the financial havoc they wreak on communities across the country. The rule for the first time makes explicit that banks can get CRA credit for investments that help communities prepare for and adapt to intensifying natural disasters.

During an FDIC board meeting Tuesday, Gruenberg listed a range of examples including investments to promote green space in underserved areas, retrofit affordable housing to withstand future disasters and provide assistance to small farms plagued by drought.

Federal Reserve Chair Jerome Powell did not mention the rule’s climate-related provisions during the Fed’s board meeting Tuesday.

Advocates of incorporating climate concerns into the CRA applauded the move. But they also raised a few issues. Among them: Regulators changed the phrase “climate resiliency” to “weather resiliency” in the final rule and didn’t use the rule to discourage lenders from doing business with high-carbon industries.

Despite opposition from several officials at the Fed and FDIC, all three agencies adopted the final rule. It will go into effect in January 2026.

Fully considering climate risk

The three agencies also jointly finalized long-awaited guidance to support large lenders’ efforts to account for climate-related financial risk.

The guidance says any bank with more than $100 billion in assets should infuse climate risk considerations into all parts of their business, ranging from strategic planning and risk management to policies and procedures.

For instance, regulators will expect banks’ boards to understand the company’s exposure to climate risk — and oversee efforts to address the issue. Boards should also consider climate change when determining the company’s overall business strategy and ensure any public climate goals are consistent with the bank’s actual activities and plans.

The guidance also says banks should also begin exploring tools for measuring their climate risk exposure, including heat maps, scenario analysis and “climate risk dashboards.”

Gruenberg emphasized during the FDIC board meeting that climate change is not merely a long-term threat for banks but poses real financial risks today. He pointed to recent turmoil in the insurance industry, where insurers are hiking premiums and exiting risky communities — a trend experts say could spill over into mortgage and real estate markets.

But Gruenberg was also among those who emphasized that the FDIC’s climate-related work is focused narrowly on financial risk — not decarbonization or climate policy.

“The FDIC is not responsible for climate policy and does not tell banks which customers to serve. However, financial institutions should fully consider climate-related financial risks as they do all other risks and continue to take a risk-based approach in assessing individual credit and investment decisions.” Gruenberg said.

Hsu echoed that message, emphasizing that the guidance does “not tell bankers what customers or businesses they may or may not bank.”

Rather, he added, “they clarify how large banks can maintain effective risk management and keep their balance sheets sound and continue to be a source of strength to their communities and customers in a range of scenarios.”