Did bank regulators just get a green light for climate stress tests?

By  Kyle Campbell

Internationally active banks could soon be required to conduct internal scenario analyses and undergo stress tests related to climate change. Both measures were called for as part of the Basel Committee on Banking Supervision’s newly finalized guidelines for climate-change supervision and management, which were released Wednesday…With the Basel structure in place, the FDIC and the OCC likely will crystallize their standards and the Federal Reserve Board could move swiftly to adopt them as well, said Karen Petrou, managing partner at Federal Financial Analytics.  Fed officials will “quickly sign on to the OCC-FDIC standards, and all of the agencies will sit down in the very near future to come up with an interagency set of high-level principles and issue those before the end of the summer,” Petrou said….Petrou said she anticipates climate supervision and the implementation of other guidelines from the Basel Committee to be top priorities for Barr should he clear a Senate-wide vote, which is expected to take place before the July 4 recess….Petrou noted, however, that the finalized Basel guidelines are more conservative than what the organization was initially considering when it began examining the topic in the spring of 2020. At the time, the committee was considering so-called “brown penalties” and risk-based capital charges for companies that lent to non-environmentally-friendly assets. Instead, she said, it has avoided the binding constraints called for by some organizations and lawmakers in the U.S. and around the world. “If Basel has any U.S. political impact, it’s giving the regulators yet another reason not to go for where they don’t want to go anyway, which is specific risk-based capital weightings or stress tests,” she said. “They can say, ‘Look, the global agencies agree, we’re not quite there yet.’”