US Banking regulators Scrap Climate Risk Guidelines Under Fire from Political Critics
In a stunning reversal that has sent shockwaves through environmental and financial circles, US Banking regulators have abruptly withdrawn long-awaited principles designed to address climate risk in the nation’s financial system. This decision, announced on a quiet Friday afternoon, comes amid mounting political criticism from conservative lawmakers who branded the guidelines as overreach by federal agencies. Critics warn that this move could leave the financial sector dangerously exposed to the escalating threats of climate change, potentially jeopardizing billions in economic stability.
The withdrawal marks a significant shift in US policy on environmental integration into banking oversight, undoing months of collaborative effort among key regulators like the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). Originally proposed in 2021, these principles aimed to guide banks in assessing and managing risks from climate-related events, such as wildfires, floods, and extreme weather that have already cost the US economy over $150 billion annually in recent years, according to Federal Reserve estimates.
Regulators Pull the Plug on Climate Guidance Framework
The core of the controversy lies in the now-defunct climate risk principles, which were intended to provide a standardized framework for banks to incorporate environmental factors into their risk assessments. These guidelines, first drafted during the Biden administration’s push for greener finance, encouraged institutions to evaluate how climate change could impact loan portfolios, insurance underwriting, and overall financial health.
Under the proposed rules, banks with assets over $100 billion were expected to conduct scenario analyses simulating climate impacts over the next 30 years. For instance, a major bank like JPMorgan Chase might have needed to model the effects of rising sea levels on coastal real estate loans or the fallout from prolonged droughts on agricultural financing. “This was about resilience, not regulation,” said Michael Barr, former Vice Chair for Supervision at the Federal Reserve, in a 2022 interview. “Climate risk isn’t a distant threat; it’s already materializing in balance sheets.”
However, the regulators’ joint statement on withdrawal cited “evolving priorities and stakeholder feedback” as the rationale. Insiders reveal that the decision was influenced by a review process initiated after Republican gains in the 2022 midterms, with agencies facing pressure to streamline operations. The FDIC, in particular, highlighted that the principles were non-binding and thus redundant, but environmental groups argue this overlooks the educational and preparatory value they offered.
Statistics underscore the urgency: A 2023 report from the Network for Greening the Financial System (NGFS), which includes the Federal Reserve, projected that unmitigated climate risks could lead to global financial losses exceeding $2.5 trillion by 2030. In the US alone, events like Hurricane Ida in 2021 caused $75 billion in damages, much of which rippled through the banking system via uninsured losses and disrupted supply chains.
Political Firestorm Ignites Over Federal Overreach
The withdrawal has ignited a fierce political criticism debate, with conservative figures accusing Banking regulators of succumbing to “woke capitalism” agendas. House Financial Services Committee Ranking Member Patrick McHenry (R-NC) led the charge, stating in a recent press release, “These principles were nothing more than a Trojan horse for ESG mandates that burden American businesses. We’re glad regulators are listening to Congress and prioritizing economic growth over climate alarmism.”
This sentiment echoes broader Republican opposition to environmental, social, and governance (ESG) investing, which has become a flashpoint in US politics. In 2023, over 20 states introduced anti-ESG legislation, targeting banks that align with climate goals. Texas, for example, blacklisted firms like BlackRock for their sustainable investment strategies, claiming they discriminate against fossil fuel projects.
Democrats and progressive lawmakers, however, decry the move as a dangerous capitulation. Senator Elizabeth Warren (D-MA), a key advocate for financial reform, tweeted, “Withdrawing climate risk principles is a gift to polluters and a disservice to everyday Americans facing floods and fires. US policy should protect our economy from climate chaos, not ignore it.” Her office followed up with a letter to the OCC demanding transparency on the decision-making process, alleging undue influence from industry lobbyists.
The political divide is stark: A Pew Research Center poll from early 2024 shows 68% of Democrats view climate change as a major threat to financial stability, compared to just 22% of Republicans. This partisan rift has paralyzed progress on climate risk integration, with regulators caught in the crossfire. Former OCC Comptroller Brian Brooks, who served under Trump, noted in a CNBC appearance, “Politics has infiltrated every corner of banking oversight. This withdrawal might buy short-term peace, but it sows long-term risk.”
Financial Sector Braces for Heightened Climate Vulnerabilities
For the financial sector, the implications are profound and multifaceted. Without the guiding principles, banks may revert to ad-hoc approaches to managing climate risk, potentially leading to inconsistent practices and blind spots in risk modeling. “This creates a patchwork of preparedness,” warns Sarah Bloom Raskin, a former deputy Treasury secretary and climate finance expert. “Smaller banks without robust in-house expertise will be hit hardest, amplifying systemic vulnerabilities.”
Consider the case of community banks in wildfire-prone California: Post-2018 Camp Fire, which destroyed Paradise and caused $16.5 billion in losses, many institutions struggled with non-performing loans tied to affected properties. The withdrawn principles would have mandated stress tests incorporating such scenarios, helping banks build capital buffers. Now, without federal nudges, adoption of voluntary tools like the Task Force on Climate-related Financial Disclosures (TCFD) remains uneven—only 40% of US banks fully comply, per a 2024 Deloitte survey.
Larger players aren’t immune either. Goldman Sachs and Citigroup have invested billions in green bonds and sustainability-linked loans, but executives privately express frustration. In a leaked memo from Bank of America, obtained by Reuters, the institution urged regulators to reconsider, stating, “Climate risks are credit risks. Ignoring them invites defaults and volatility.” Insurance arms of financial giants, like those at Berkshire Hathaway, have already hiked premiums by 20-30% in high-risk areas, signaling market-driven adjustments that the principles could have standardized.
Broader economic ripple effects loom large. The US Treasury’s 2022 climate report estimated that physical risks from climate change could shave 1-2% off annual GDP growth by 2050 if unaddressed. For banks, this translates to higher provisioning for loan losses—potentially $100 billion more in the next decade, according to Moody’s Analytics. Investors are taking note: ESG funds saw $50 billion in outflows in 2023 amid political backlash, yet climate-aware portfolios outperformed traditional ones by 5% on average, per Morningstar data.
Environmental Advocates Rally Against Regulatory Retreat
Environmental organizations have mobilized swiftly, framing the withdrawal as a setback for global climate leadership. The Sierra Club’s executive director, Jon Devine, issued a scathing statement: “Banking regulators are abandoning their duty to safeguard the public from foreseeable disasters. This politically motivated decision endangers communities already bearing the brunt of climate inaction.”
CERES, a coalition of investors managing $50 trillion in assets, launched a campaign urging banks to self-implement climate risk frameworks. “The federal government may step back, but the markets won’t,” said Mindy Lubber, CERES president. Their report highlights how European banks, under the EU’s Sustainable Finance Disclosure Regulation, have integrated climate risks more deeply, reducing exposure by 15% since 2020.
Grassroots voices amplify the urgency. In Florida, where hurricanes like Ian in 2022 inflicted $112 billion in damages, local bankers and residents alike decry the policy shift. “We’ve seen our town underwater twice in five years—how can banks lend responsibly without climate guidance?” asked Maria Gonzalez, a small business owner in Fort Myers, in an interview with NPR.
Legal challenges are on the horizon. The Natural Resources Defense Council (NRDC) is exploring lawsuits against the regulators, arguing the withdrawal violates the Administrative Procedure Act by lacking proper justification. “This isn’t just policy; it’s a failure of governance,” said NRDC attorney Rebecca Beumer. Meanwhile, international bodies like the Basel Committee on Banking Supervision continue to advance climate standards, pressuring US firms to align or risk competitive disadvantages abroad.
Charting the Path Forward Amid Policy Uncertainty
Looking ahead, the withdrawal leaves a vacuum that could reshape US policy on climate risk for years. With the 2024 elections looming, any reversal may hinge on congressional control—Democrats push for reinstatement via the proposed Climate Risk Disclosure Act, while Republicans advocate for deregulation. The SEC’s ongoing climate disclosure rules, separate from banking oversight, offer a potential lifeline, mandating public companies to report climate impacts starting in 2025.
Banks are adapting proactively: Wells Fargo announced an internal climate risk committee in response, and the American Bankers Association is developing voluntary guidelines. Yet experts caution that fragmented efforts won’t suffice. “Systemic risks require systemic solutions,” emphasized Federal Reserve Governor Lisa Cook in a 2023 speech. “The financial sector must evolve, with or without federal mandates.”
Globally, the US retreat contrasts with aggressive moves elsewhere—the UK’s Prudential Regulation Authority now requires climate stress tests for major banks, and China’s central bank has embedded green finance into its monetary policy. This divergence could isolate American institutions, as international lenders demand climate-aligned collateral.
Ultimately, stakeholders from Wall Street to Main Street face a pivotal choice: treat climate risk as a political football or a core business imperative. As wildfires rage in the West and floods submerge the Midwest, the costs of inaction mount. For the financial sector, the real test will be whether innovation and market forces can fill the void left by retreating banking regulators, ensuring resilience in an era of unrelenting environmental change.
