Last month, the nation’s top banking and financial regulators released a groundbreaking report that recognizes for the first time that climate change is a threat to the stability of the U.S. financial system. Sitting as the Financial Stability Oversight Council (FSOC) — a body created in 2010 to identify and respond to systemic risks facing the banking, securities, derivatives and insurance sectors — regulators concluded that they must quickly act to “identify and address climate-related risks to the financial system,” and they provided over 30 steps they can begin taking immediately.
These top regulators all agreed except one: The Chairman of the Federal Deposit Insurance Corporation (FDIC), Jelena McWilliams, abstained from voting on the report, saying that the Council did not “conduct sufficient analysis, fully consider broader macro consequences and thoroughly evaluate the impact of its recommendations.”
Chairman McWilliams’s reasons for abstaining are baseless. For years, experts have not only warned that “climate shocks could trigger precipitous asset depreciation and affect the stability of public policy,” but have also developed models for incorporating climate risks into asset valuations and methods for conducting climate stress tests to evaluate the strength of financial institutions in the face of climate change. Regulators today have the knowledge of what risks financial institutions face and the know-how to address them.
Unfortunately, McWilliams’s abstention is also quite significant. The FDIC provides deposit insurance for all U.S. banks and is one of three federal regulators that works to protect the nation’s banking system; as such, it has significant power to require banks to address climate risks. As the primary regulator for nearly 4,000 banks, the FDIC can require that they publicly disclose any assets that contribute to climate change, mitigate climate risks to their portfolios, provide loans to vulnerable communities facing the worst impacts of climate change, and otherwise address climate risks. And as the insurance provider for all banks, the FDIC can increase deposit insurance premiums for those that face the greatest risks from the transition to a green economy.
The FDIC can also stand in the way of climate risk mitigation efforts. Statutes frequently require the three federal bank regulators — the Comptroller of the Currency (OCC), Federal Reserve, and FDIC — to issue regulations jointly, and the FDIC’s refusal to adopt climate-change mitigation efforts in these rules means that the other two regulators cannot either. Similarly, even when not legally required, the three regulators tend to coordinate their activities to prevent regulatory arbitrage; the FDIC’s refusal to implement climate regulations adopted by the OCC and Federal Reserve means that banks could simply switch to being regulated by the FDIC to avoid those new rules.
McWilliams’s abstention signifies that she does not intend for the FDIC to engage in these necessary efforts and that she may even use the FDIC to hinder the efforts of other agencies.
It is time for new leadership at the FDIC that will ensure addressing climate risk is a priority. Fortunately, the other members of the FDIC’s board of directors have the inherent authority to take control of the agency; they need only to demonstrate the will to do so. The other directors have inherent authority under the Board’s bylaws to direct staff to begin undertaking the activities recommended by the FSOC report and more, including issuing climate supervisory guidance for banks, creating climate scenario analyses and scouring existing regulations for rules that should be updated to address climate risks. The directors could even remove the FDIC’s chief of staff if they did not trust him to implement these efforts.
As the FSOC declared, it “views climate-related financial risks as an emerging threat to the financial stability of the United States.” Chairman McWilliams should not be allowed to stand in the way of mitigating these risks.
Todd Phillips is a director of financial regulation and corporate governance at the Center for American Progress and is formerly an attorney for the FDIC.