Van Hollen Joins Schatz, Colleagues in Urging Regulators to Strengthen Climate-Related Financial Risk Management

September 20, 2024

Van Hollen Joins Schatz, Colleagues in Urging Regulators to Strengthen Climate-Related Financial Risk Management

Pilot climate exercise exposed significant shortfalls in managing risk as United States experiences record disasters.

Today, in advance of Climate Week and following a year of record disasters, U.S. Senator Chris Van Hollen (D-Md.) joined Senator Brian Schatz (D-Hawai'i) and nine Senate colleagues in calling on the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency to work with financial institutions to strengthen efforts to plan for and manage climate-related financial risk. Van Hollen and Schatz were joined by U.S. Senators Elizabeth Warren (D-Mass.), Ed Markey (D-Mass.), Peter Welch (D-Vt.), Patty Murray (D-Wash.), Jeff Merkley (D-Ore.), Sheldon Whitehouse (D-R.I.), Cory Booker (D-N.J.), Michael Bennet (D-Colo.), and Alex Padilla (D-Calif.).

In their letter to Federal Reserve Chair Jerome Powell, Federal Deposit Insurance Corporation Chairman Martin Gruenberg, and Acting Comptroller Michael Hsu, the senators said, "Last year, the United States experienced a record 28 disasters that cost at least one billion dollars. Climate-related disasters are increasing in both their frequency and severity, posing threats to the United States' economy as insurers face rising losses and leave climate-vulnerable markets. Additionally, global clean energy investment is far outpacing investment in fossil fuels. Banks will play an important role in financing clean energy technologies and ensuring the United States' competitiveness in the clean energy market. We must ensure that our financial institutions understand and prepare for climate-related financial risk."

The senators continued, "It is critical to our economic stability that we plan for climate risks and align investments with the opportunities presented by the clean energy transition."

The full text of the letter can be found here and below:

Dear Chair Powell, Chairman Gruenberg, and Acting Comptroller Hsu:

We write to inquire about your plans to address climate-related financial risk (CRFR) and conduct further climate scenario analysis (CSA) exercises, following the pilot CSA exercise concluded in May 2024 and your finalization of the Principles for Climate-Related Financial Risk Management for Large Financial Institutions. It is critical to our economic stability that we plan for climate risks and align investments with the opportunities presented by the clean energy transition.

Last year, the United States experienced a record 28 disasters that cost at least one billion dollars. Climate-related disasters are increasing in both their frequency and severity, posing threats to the United States' economy as insurers face rising losses and leave climate-vulnerable markets. Additionally, global clean energy investment is far outpacing investment in fossil fuels. Banks will play an important role in financing clean energy technologies and ensuring the United States' competitiveness in the clean energy market. We must ensure that our financial institutions understand and prepare for CRFR.

Your agencies' Principles for Climate-Related Financial Risk Management for Large Financial Institutions and the Federal Reserve's pilot CSA exercise for the nation's six largest banks acknowledge the importance of scenario analysis in measuring and managing CRFR. To fulfill its mandate of ensuring the safety and soundness of our banks and financial system, the Federal Reserve must use its authority under Section 39 of the Federal Deposit Insurance Act to continue CSA exercises with more in-depth requirements and incorporate CRFR into annual stress testing.

Participants in the pilot CSA "reported significant data and modeling challenges in estimating climate-related financial risks," particularly for real estate exposures, insurance, obligor transition risk management, and infrastructure. The pilot also showed risks for the participating banks in both the physical and transition risk scenarios, including increases in the probability of default. Lack of insurance coverage increased the probability of default across portfolios for most participants, and the exercise identified transition risk for commercial real estate loans across all property types.

While scenario analysis is not the only tool financial regulators should be employing, it is an important first step in identifying risks faced by financial institutions. As you consider next steps to address CRFR, we urge you to work together with the Federal Stability Oversight Council and climate scientists at the Environmental Protection Agency, National Oceanic and Atmospheric Administration, Department of Energy, United States Geological Survey, Department of the Interior, and other agencies as appropriate to develop future CSA scenarios that include, at a minimum, longer time horizons; multi-risk scenarios; disorderly and delayed transition scenarios; indirect impacts; market, operational, and liquidity risk; and assessments of additional sectors such as agricultural, energy, and retail portfolios. Future scenarios should also provide educational resources for banks, including instruction on how to identify what transition risks banks will face.

To better understand how you plan to manage CRFR and ensure your supervised financial institutions do the same, we request that you provide answers to the following questions no later than October 11, 2024:

1. When will additional CRFR scenario analysis exercises take place?
2. 1. Will additional exercises incorporate the recommendations outlined above?
   2. How will you ensure participants have access to the data and models they require to appropriately manage CRFR?
   3. Will you expand the participation of banks in future CSA exercises beyond the six banks that participated in the pilot?
3. Do you intend to incorporate CRFR into annual stress testing, and if so, when?
4. What is your assessment of the progress large banks have made in implementing the joint Principles for Climate-Related Financial Risk Management for Large Banks?

Thank you for your attention to this important matter. We look forward to your responses.

Sincerely,

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