No matter how often bank regulators, international standard setters, rating agencies, or financial reform advocates warn banks that climate change is serious, the frequency of disasters driven by climate change shows they are not heeding the warnings. Such disasters have significantly increased and intensified in the last several decades. According to the National Centers for Environmental Information, from 1980–2024, there have been slightly more than 400 climate disaster events in the United States with losses exceeding $1 billion. Banks in the U.S. are not required to measure and report to regulators or market participants how climate change can impact their credit and investment portfolios; consequently, none of us can gauge how banks can withstand increasingly more damaging natural disasters.
Trump Administration Shows Strong Signs of Eliminating Any Bank Focus on Climate Change
Speaking before the House’s Subcommittee on Consumer Protection and Financial Institutions in 2021, I made several climate change risk identification, measurement, and disclosure recommendations to bank regulators and to bank executives. On October 2022, the Office of the Comptroller of the Currency appointed a Chief Climate Risk Officer. Another commendable action was in October 2023 when together with the Federal Reserve and the Federal Deposit Insurance Corporation, the OCC published the Principles for Climate-Related Financial Risk Management for Large Financial Institutions. Also in 2023, for the first time, the Federal Reserve conducted a pilot climate scenario analysis to identify the climate risk-management practices and challenges of JPMorgan, Citibank, Bank of America, Goldman Sachs, Morgan Stanley, and Wells Fargo. According to the Fed, the CSA’s purpose was also “to enhance the ability of large banking organizations and supervisors to identify, estimate, monitor, and manage climate-related financial risks.”
The incoming administration unfortunately is showing signs that not only is climate change not a focus, it could dismantle President Biden’s climate change actions and also punish organizations that focus on this important issue. In his last administration, Trump was quick to issue an executive order dismantling climate change actions during the Obama administration.
Note: Red line: Trump eliminates key Biden climate policies. Blue line: Biden climate policies stay in place. Gray line: The current U.S. climate target.
Moody’s Ratings in its 2025 Environment, Social, and Governance Outlook report explained that “the US (Aaa negative) election outcome may have a dampening effect on global climate action.” Importantly Moody’s Ratings analysts pointed out that “many countries will move forward with clean energy investment to meet decarbonization as well as energy security and economic competitiveness objectives.” Unfortunately, since the Trump administration has already been signaling that banks should have less regulation, it is highly unlikely that banks will be required to be transparent about their exposures to climate change in their lending or trading portfolios. Additionally, more American banks and other types of financial institutions are likely to reduce or eliminate commitments to reducing how they contribute to climate change.
It is important to remember that banks are special, because they are interconnected to every facet of an economy. Corporations and other financial institutions often follow whatever bank executives do. In just the last 30 days, the six largest banks in the U.S. (JPMorgan, Citibank, Bank of America, Goldman Sachs, Morgan Stanley and Wells Fargo), reneged on their commitment to the Net Zero Banking Alliance ; Blackrock also left the group this week. These developments are troubling, since the point of this bank-led and United Nations-backed organization is for the members to align their lending, investment, and capital markets activities with net-zero greenhouse gas emissions by 2050. Ironically, the NZBA just announced in October that the group was making good progress. If banks were prepared for the adverse impact of climate change, the fact that they fled the NZBA might not be as troubling. However, none of six American banks’ CEOs has given a credible explanation as to why fleeing this group was necessary; worst yet, none has explained what the commitment to net-zero greenhouse emissions of his or her bank will be. Once again, our financial institutions’ leadership on the international stage will be sorely lacking.
Banks Are Unprepared For Climate Change
When the Federal Reserve released the climate change scenario results on May 2024, the data was more convincing that U.S. banks are not prepared to be sufficiently capitalized and liquid to survive catastrophic climate change events. The Fed stated that the six banks “reported significant data and modeling challenges in estimating climate-related financial risks. For example, participants noted a lack of comprehensive and consistent data related to building characteristics, insurance coverage, and counterparties’ plans to manage climate-related risks. In many cases, participants relied on external vendors to fill data and modeling gaps.” Remember, these are the banks, whose professionals tell us repeatedly that they know how to measure risks emanating from commercial real estate exposures, cryptocurrencies, leverage portfolios, and financial derivatives.
So, is it indeed true that there is not enough high-quality data to model climate-related financial risks? If so, then banks need to increase their capital and liquidity levels to withstand the uncertainty of how much climate change could hurt their safety and soundness. Or is it that banks do not want to measure how severe climate change could hurt them, since disclosing that could hurt their stock and bond prices? Either way, legislators and bank regulators need to demand that banks focus on how climate change could imperil the economy. In the climate change scenario exercise, banks did admit that “better understanding and monitoring of indirect impacts (e.g., disruptions to local economies) and chronic risks (e.g., sea level rise) are important for managing climate-related financial risks.”
Also important to remember is that banks are very connected to insurance companies. Banks extend all kinds of loans and lines of credit to insurance companies; they are also counterparties to insurance companies in repurchase agreements and financial derivatives. Importantly, the type and number of mortgages that banks underwrite, significantly depends on whether and how residential and commercial borrowers are insured. The six big banks highlighted in the Fed climate change exercise “the important role that insurance plays in mitigating the risks of climate change for consumers, businesses, and banks. They noted the need to monitor changes across the insurance industry, including changes in insurance costs over time, and the impacts of those changes on consumers and businesses in specific markets and segments.”
Climate change events are significant drivers of rising credit, market, operational and liquidity risks in banks. These financial risks are very interconnected, and all too often are positively correlated; this means that precisely when borrowers who are hurt by climate change default on their loans, this leads to market volatility because stock and bond prices decrease precipitously. Hence, banks’ asset quality can suffer from both credit and market risks simultaneously. Because banks and insurance companies have significant asset and liability mismatches due to their role as financial intermediaries, any climate change stress can quickly hurt their earnings and even their liquidity. The interconnections between banks, insurance companies, and other financial institutions means that even if climate change were to hurt only one type of financial institution, there is a very high risk of contagion throughout the entire financial system and the economy of Main Street.
Banks’ Bonds And Stocks Do Not Price In Climate Change Risk
At the end of last year, the Senate Budget Committee released a report that details the detrimental effect of climate change on every sector of the economy, including capital markets. Now, with the tragic fires in Los Angeles still burning, the costs will be significantly higher.
Climate-change risk drivers can generate significant costs and financial losses for banks. Both banks and bank supervisors need to evaluate banks’ existing risk management policies, processes, and procedures to assess whether banks are sufficiently capitalized and liquid to cope with climate-change related risks. Unfortunately, investors are at risk because banks’ bonds and stocks have not priced in climate change risks, because financial institutions and corporations are not required to identify, measure, control and monitor their climate-related risks and to disclose them to the public. Bond and stock prices are important markets signals not only for investors but also for regulators. This opacity in the financial system is dangerous not only to investors but also to ordinary Americans. Rather than influencing banks to ignore climate change, the incoming Trump administration and bank regulators should be pushing banks to do the opposite.
Other Articles By This Author About Climate Change And Operational Risk
Climate Change Risks Are Rising In Importance For The Office Of The Comptroller Of The Currency
U.S. Bank Regulators Should Require Robust Climate Change Risk Measurements and Disclosures from Banks
The Financial Stability Board’s Climate-Change Road Map Identifies Data Gaps That Need To Be Addressed
Rodríguez Valladares Testified On Climate as a Systemic Risk To The Financial System
Rodríguez Valladares Testifies On Climate Change And Financial Systemic Risk
All U.S. Bank Regulators Should Require Banks To Incorporate Climate Change Risks into Their Risk Management Frameworks and Disclosures
Banks Can Suffer Financial Losses From Physical And Transition Climate Change Risk Drivers
Banks Should Implement Principles For Operational Resilience
Climate Change Is A Key Priority To The G20 And Financial Stability Board
Climate Change Risks Should Be A Priority For U.S. Bank Supervisors
Ignoring Climate Related Physical And Transition Risks Imperil Global Financial Stability
Rising Sea Levels Pose Increasing Credit Risks for Many U.S. Coastal States and Investors in their Bonds
Operational Risk Ignored More Than A Bridesmaid
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