Will Wall Street banks avoid tough new climate-risk rules?

US regulators, led by the Federal Reserve, have thwarted a push to make climate risk a focus of global financial rules, according to people familiar with the matter.

European central bankers have been advocating for the Basel Committee on Banking Supervision to agree on requiring lenders to disclose their strategies for meeting green commitments. In closed-door meetings, US officials have cited their narrow mandate and concerns that the Basel Committee was overstepping its purpose, some of the people said.

The rift at the committee, which brings together representatives from regulators and central banks around the world to coordinate rules and oversight of lenders, has been particularly pronounced between some officials at the Fed and the European Central Bank, which has been an avid supporter of more stringent climate requirements, the people said. 

Spokespeople for the Fed, the Basel Committee and the ECB declined to comment. The details of the private deliberations by the committee are based on conversations with about a half dozen senior officials, who asked not to be identified because the conversations are confidential, and documents obtained by Bloomberg News.

The development coincides with a wider pushback in the US that’s included Republican-led legal attacks against financial firms that factor environmental, social and governance, or ESG, elements into business and investing decisions. At the same time, Fed Chairman Jerome Powell has made clear in public comments that the Fed shouldn’t be mistaken for a “climate policymaker.”

US President Joe Biden’s top financial watchdogs are already facing considerable resistance to major regulatory efforts beyond the thorny issue of climate. Michael Barr, the Fed’s vice chair for supervision appointed by the Biden administration, has endured one of Wall Street’s fiercest lobbying campaigns against a signature overhaul that would require the biggest US lenders to increase the amount of capital they have to hold by almost 20%. 

Barr was nominated for his role after Sarah Bloom Raskin, a former Fed governor and deputy Treasury secretary during the Obama administration, withdrew amid opposition to her efforts to bring climate change into the policymaking debate.

Since July, Barr has been dealing with the fallout of his proposal for the so-called Basel III Endgame rules. And following fierce opposition from the industry, Powell recently signaled that the plan may now be drastically scaled back.

Reaching a consensus within the Basel Committee is often characterized by a back and forth reflecting national interests and the US has significant sway. The Fed must comply with US laws that traditionally define risks to the banking system, while the committee’s mandate is to set international standards.

The US opposition to climate rules at the Basel Committee level has been particularly pointed, according to some of the people familiar with the process. The Fed isn’t alone, however. Officials at the Bundesbank have previously struck a more cautious tone than the ECB on how to incorporate climate in supervision or monetary policy.

The Basel Committee can’t force countries to implement its standards. Instead, its power lies in arriving at a baseline for global rules that individual jurisdictions then develop and enforce. For example, jurisdictions across the world pushed through a range of additional capital requirements that were agreed by the Basel Committee after the global financial crisis of 2008. 

As recently as last year, the position of the Basel Committee was that climate change and its associated risks have the potential to affect the “safety and soundness” of individual banks, as well as the “stability of the broader banking system.” 

In a letter to Powell in November, Republicans Patrick McHenry, chairman of the House Financial Services Committee, and Andy Barr, chairman of the Subcommittee on Financial Institutions and Monetary Policy, expressed concern about the “growing influence of global governance bodies on US bank regulation.” Among the examples of “unaccountable and opaque” entities, the pair noted the Basel Committee and made special mention of its principles for managing climate-related financial risks.

The lever through which the Basel Committee can include climate risk in financial regulations is the Task Force on Climate-related Financial Risks. Co-chaired by Kevin Stiroh of the Federal Reserve Bank of New York and Frank Elderson of the ECB, TFCR is the engine room for all things climate at the Basel Committee. Its scope of work covers the three pillars of Basel regulation — capital requirements, supervision and disclosures.

As far back as August, the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. sent a letter to the Basel Committee asking for revisions to its planned climate-risk disclosure framework for banks. In the document, which was seen by Bloomberg News, the trio suggested the committee was overstepping its mandate and requested the removal of more prescriptive elements of the framework, such as financed emissions disclosures.

Then in September, Barr and Michael Hsu, the acting comptroller of the currency, each conveyed at a meeting of global banking supervisors that the US was operating within a very narrow mandate limited to the financially material risks posed by global warming, according to the people familiar with the matter.

Some attendees were left with the impression that US officials were trying to be careful not to push for a policy that could accelerate a transition away from fossil fuels, the people said.

A spokesperson for Hsu and the FDIC declined to comment.

In October, the Fed, the FDIC and the OCC issued principles on climate-related financial risk management for large institutions. In response, Fed Governor Christopher Waller said that climate risks weren’t “sufficiently unique or material to merit special treatment relative to other risks.” Governor Michelle Bowman said a specific focus on climate issues “could ultimately distract attention and resources” from “core risks,” including credit and interest rates.

A month later, a Basel proposal on climate-risk disclosures for banks was put out for consultation. After lobbying by the Fed, the Basel Committee suggested certain elements might be subject to the discretion of national regulators rather than universally adopted, according to a person familiar with the matter. 

The US, which unlike other countries didn’t put forward any of its banks to be subject to analysis of how they incorporate climate issues in credit-risk assessments, also has sought to halt work on monitoring the implementation of the Basel Committee’s principles for the effective management and supervision of climate-related financial risks, people familiar with the process said.

At a meeting of the Basel Committee in December, the Fed’s representative led a campaign to go a step further and scuttle use of the word “guidance” as a way to describe the TFCR’s work on transition plans, according to some of the people and documents reviewed by Bloomberg. That would make it less likely that the Basel requirements could become binding for US banks.

Then, at a two-day meeting in Madrid that ended on Feb. 29, the Basel Committee endorsed the Fed’s proposal to make guidelines on climate transition plans for banks optional. It also agreed that its so-called Pillar I work, which covers industrywide capital rules, would be halted, according to Basel Committee documents.