The New York Department of Financial Services (DFS) has issued a bulletin on climate change and financial risks to the financial institutions and insurance companies it supervises regarding the impact of climate change on those institutions. DFS asserts that “[f]inancial risks from climate change are unprecedented” and notes a warning from the Bank for International Settlement that climate change carries “potentially extremely financially disruptive events that could be behind the next systematic financial crisis.” The more than eight-page bulletin discusses the risks to financial institutions posed by climate change and also identifies the expectations of DFS as to steps regulated entities should take to mitigate those risks.

The bulletin highlights the accelerating cost of climate-related natural disasters, noting the 10 hottest years on record have all occurred since 1998, with the highest level of carbon dioxide in our atmosphere recorded in May 2020. In describing the physical risk to property and assets of financial institutions, DFS discusses the impact of the increasing frequency and severity of severe weather events on commercial properties outside federal flood zones resulting in significant losses frequently not covered by insurance. DFS also notes that flood risk could disproportionately impact regional and community banks that are more vulnerable to geographically concentrated losses.

The advisory bulletin also discusses the financial impact of the shift away from a carbon-based economy, which has been driven by advancements, consumer sentiment and regulatory policy. DFS has also joined the Network of Central Banks and Supervisors for Greening the Financial System, a group of central bankers and supervisors who recognize the significance of climate change and are committed to managing financial risks created by climate change.

DFS Expectations

  • DFS expects regulated banks and insurance companies to begin integrating the financial risks from climate change into their governance frameworks, risk management processes, and business strategies. Suggestions to begin this effort include forming a board committee or designating a board member with corresponding senior management review to perform an enterprise-wide risk assessment to evaluate climate change and its impact.
  • DFS also expects regulated non-depository entities to conduct a risk assessment regarding the physical and transitional risks of climate change. This assessment should consider disruptive impacts of climate change on communities and customers, including consideration of supply chain disruption, higher default rates, customer relocation, and loss of income. Business continuity should consider supply chain disruption, changes to investor programs and sentiments.

DFS is currently developing a method to integrate review of entity preparation for climate-related risks into its supervisory mandate. In addition to New York-licensed banks and insurance companies, this bulletin was sent to New York-regulated mortgage bankers, mortgage servicers, regulated money transmitters, licensed lenders, sales finance companies, premium finance agencies, and virtual currency companies. The financial strength of these entities totals more than $8.3 trillion in assets combined.