Federal Banking Regulators Rescind Climate Risk Planning Mandate
Federal regulators have revoked requirements that the nation’s largest financial institutions incorporate climate risk considerations into their long-term strategic planning, according to reports from Washington and New York. The policy reversal affects banks with over $100 billion in assets and represents the latest removal of climate-focused measures from federal financial regulation.
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The Federal Reserve and Federal Deposit Insurance Corporation announced Thursday that existing regulations requiring banks to “consider and appropriately address all material financial risks” provide sufficient protection against financial system shocks. Federal Reserve Board staff reportedly characterized the climate-specific guidance as “distracting” and “not necessary,” while Republican Party officials had previously labeled the policy regulatory overreach.
Diverging Perspectives on Climate Risk Management
The decision has exposed significant divisions among financial regulators and policymakers. Federal Reserve Governor Michael S. Barr, a Biden appointee, expressed concern that revoking the principles “defies logic and sound risk-management practices” as climate risk factors continue to intensify. He warned of potential “significant economic and financial consequences” without proper planning for climate-related disruptions.
In contrast, Fed Vice Chair for Supervision Michelle W. Bowman defended the rescission, suggesting that requiring banks to consider climate risks beyond their typical planning horizons would invite “highly speculative” analysis of limited utility. Fellow Trump appointee Christopher J. Waller offered a terse endorsement of the change: “Good riddance.”
Broader Context of Climate Policy Shifts
This regulatory reversal occurs amid broader climate change policy shifts within the federal government. The FDIC board, composed of Trump administration appointees including White House budget director Russell Vought, has previously questioned climate change concerns. The move follows similar actions by the Office of the Comptroller of the Currency, which abandoned the climate risk policy in March.
Analysts suggest the changing political landscape in Washington has influenced regulatory approaches to climate-related financial risks. “Certainly the political mood has changed in Washington,” said Ian Katz, managing director at policy research firm Capital Alpha Partners.
Industry Response and Existing Risk Management
Banking industry representatives welcomed the regulatory change. Austin Anton, spokesman for the Bank Policy Institute, stated that “banks already manage climate risk as part of their existing risk management frameworks” and characterized the rescinded guidance as redundant rather than additive.
The decision comes despite previous acknowledgments from major financial institutions about their climate risk management efforts. In 2023, the Bank Policy Institute noted its members were “devoting substantial resources” to managing climate-related financial risks. The nonpartisan organization represents the nation’s leading financial institutions.
Scientific Context and Economic Implications
Researchers have documented that Earth’s average temperatures have risen more than 1 degree Celsius over the past two centuries primarily due to fossil fuel combustion and the greenhouse effect. Scientific consensus indicates that even modest temperature increases correlate with more extreme weather events capable of destroying property and agricultural production.
Economic analyses suggest continued warming could cost the global economy over $38 trillion annually in coming decades. Meanwhile, parallel industry developments in other sectors demonstrate how regulatory approaches to emerging risks continue to evolve across financial markets.
Regulatory Precedents and Future Implications
The rescinded climate risk guidance, originally adopted in October 2023, did not establish specific methodologies for how banks should incorporate climate considerations but required they do so across various business aspects. Former Biden administration official Laurie Schoeman noted the value of having “the government saying, ‘We didn’t care how you were doing it, but you had to do it.’”
This regulatory shift follows similar modifications to climate disclosure requirements. The Securities and Exchange Commission previously scaled back ambitious climate risk reporting rules for public companies after opposition from various stakeholders. The changing regulatory landscape reflects broader market trends where policy adjustments increasingly consider both risk management and industry practicalities.
Broader Industry Context
The financial sector’s approach to climate risk management continues to evolve amid changing regulatory expectations and physical climate impacts. As institutions navigate these complexities, many are watching how related innovations in risk modeling and disclosure might develop in the absence of specific regulatory mandates.
Simultaneously, technological advancements in other sectors demonstrate how recent technology developments often outpace regulatory frameworks, creating challenges for standard-setting bodies across industries.
Fed Governor Lisa D. Cook suggested that large banks would likely continue considering weather-related risks despite the regulatory change, indicating that financial institutions recognize the material nature of climate-related exposures regardless of specific requirements.
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