The Basel Committee on Banking Supervision published its Principles for the Effective Management and Supervision of Climate-related Financial Risks. The document forms part of the Committee's holistic approach to addressing climate-related financial risks to the global banking system and seeks to improve banks' risk management and supervisors' practices in this area.
The document outlines numerous principles for addressing climate-related risks that will form the bases of requirements from national level regulators when addressing climate-related risks for financial institutions and credit unions. The principles outline numerous elements that should be included in national-level rulebooks as follows:
- internal control framework;
- capital and liquidity adequacy requirements;
- a risk management process;
- management monitoring and reporting requirements;
- comprehensive management of credit risk requirements;
- comprehensive management of market, liquidity, operational and other risks, and
- scenario analyses.
WOCCU commented on this document during the consultation process noting that the principles may result in a significant increase in regulatory burden for smaller, community based deposit taking institutions such as credit unions. The principle of proportionality is key to allowing credit unions to address climate-related risks, but in a manner appropriate for their size and complexity.
The committee included its strong support of the principle of proportionality by including the following language as follows:
- The principles seek to accommodate a diverse range of banking systems and are intended to be applied on a proportionate basis depending on the size, complexity and risk profile of the bank or banking sector for which the authority is responsible.
- Supervisors should set expectations in a manner proportionate to the nature, scale and complexity of relevant banks’ activities.
- Where appropriate, supervisors should determine that banks have in place a scenario analysis programme that is proportionate to their size, business model and complexity, in order to assess the resilience of their business models and strategies to a range of plausible climate-related outcomes
- Banks should manage climate-related financial risks in a manner that is proportionate to the nature, scale and complexity of their activities and the overall level of risk that each bank is willing to accept.
This strong embrace of proportionality should provide clear direction to credit union supervisors and regulators to engage in the important and necessary process of tailoring these principles for credit unions in manner that does not impose an unreasonable regulatory burden on credit unions while allowing the regulated entity to address climate-related risks.
A copy of the principles can be viewed here.