Community Bank Climate Change Regulation

Position

  • With decades of experience managing concentration risks and natural disasters, community banks are seasoned experts at monitoring the risk of their lending and investment portfolios and do not need additional regulation to manage their potential climate-related financial risks.

  • While ICBA supports certain incentives to industries affected by climate change, we will oppose any climate risk regulation that adversely impacts community banks and their ability to support their communities and customers.

  • The Financial Stability Oversight Council (FSOC), in conjunction with the banking agencies, should conduct a series of outreach meetings with community bankers prior to instituting any supervisory guidance on climate risks. To ensure that the community bank perspective is appropriately represented and that climate-risk regulation does not unfairly penalize or overburden community banks, ICBA recommends that FSOC include an individual with community banking experience on its new Climate-Related Financial Risk Advisory Committee (CFRAC).


Background

Regulatory Initiatives. The Biden administration and the 117th Congress are increasingly focused on climate change and are pressuring the financial regulatory agencies to do more to address the issue. In response, the OCC has proposed for comment a set of principles to support the identification and management of climate-related financial risks for large national banks.

Furthermore, the SEC is expected to propose in early 2022 mandatory climate change disclosures for publicly held banks. FSOC issued a report calling climate change an “emerging threat to the financial stability of the United States” and recommending the regulators issue additional regulation and guidance on climate risks including using scenario analysis, where appropriate, as a tool for assessing climate-related financial risks.

Regulation is Unnecessary and Burdensome. Community banks have decades of experience managing concentration risks and are experts at knowing when and how to reduce their loan concentrations during economic downturns and how to mitigate risks. Community banks’ longstanding and tried-and-tested underwriting and insurance practices sufficiently address climate-related financial risks, as evidenced by the absence of community bank failures following weather events.

Since the early 19th century, community banks have prepared for, responded to, and survived myriad natural disasters, including catastrophic hurricanes, tornadoes, flooding, droughts, wildfires, and wind events. Community banks, as stewards of their local communities, are best positioned to monitor the overall risk of their geographically limited loan portfolios and investment practices and should not be subject to overly burdensome, duplicative, or unnecessary regulations aimed at controlling climate-related financial risks posed by complex, global, and systemically important institutions.

Subjecting community banks to any type of mandatory climate risk regulation, scenario analysis, or enhanced climate-disclosure requirements is not only unnecessary but will also cause many small businesses that operate within community bank footprints to be “choked off” from the financial system.

ICBA Opposes Community Bank-Adverse Climate Change Regulation. ICBA will resist efforts by lawmakers and regulators to impose or to incorporate as part of their supervision and examination of community banks: (1) hard concentration limits on any type of legal lending, including lending to fossil fuel or other carbon-intensive industries; (2) community bank stress testing or scenario analysis based on remote, highly speculative, or unquantifiable climate change assumptions; (3) mandatory climate change disclosure requirements by community banks; and (4) capital requirements based on climate risks.

Mandatory climate change disclosures would be particularly burdensome and unnecessary to community banks and would be viewed similarly to “Operation Chokepoint”—i.e., an attempt to discourage banks from doing business with certain legal but disfavored industries, such as carbon-intensive industries.

Support for Targeted Incentives. ICBA supports providing incentives to industries deemed to be affected by climate change if such incentives reward current and future voluntary practices and if climate impact is verified by accurate scientific analysis. Such incentives could include carbon sequestration or other climate change mitigation efforts.

Regulators Need Community Bank Feedback. FSOC, in conjunction with the banking agencies, should conduct a series of outreach meetings with community bankers prior to instituting any supervisory guidance on climate risks. The purpose of these outreach meetings would be to gather evidence on how community banks are successfully managing climate risks and how burdensome additional “one-size-fits-all” climate risk supervision would be for the community banking industry.

To ensure that the community bank perspective is appropriately represented, and that climate-risk regulation does not unfairly penalize or overburden community banks, ICBA recommends that FSOC include an individual with community banking experience on its new Climate-Related Financial Risk Advisory Committee (CFRAC). Furthermore, in addition to gathering information on climate-related financial risks from a broad array of stakeholders, CFRAC should also examine how community banks currently and successfully incorporate climate risks into their lending and investment strategies.

Subject Experts: Christopher Cole and Jenna Burke