Apr 25 -- The National Credit Union Administration (NCUA) is seeking public input on current and future climate and natural disaster risks to federally insured credit unions (FICUs), related entities, their members, and the National Credit Union Share Insurance Fund (SIF). The NCUA also seeks input of any interested parties on the development of potential future guidance, regulation, reporting requirements, and/or supervisory approaches for FICUs' management of climate-related financial risks. For consideration, comments must be received on or before June 26, 2023.
The NCUA is an independent federal agency that insures shares at FICUs and charters and regulates federal credit unions (FCUs). The NCUA is charged with protecting the safety and soundness of FICUs and, in turn, the SIF through regulation and supervision. The NCUA also works to protect credit union members and consumers.
The NCUA's mission is to “protect the system of cooperative credit and its member-owners through effective chartering, supervision, regulation, and insurance.” Consistent with these aims, the NCUA has statutory responsibility for a wide variety of regulations that protect the credit union system, members, and the SIF.
Climate change is accelerating and the number—and cost—of climate-related natural disasters is rising. The economic effects of these events are clear. Each year, natural disasters like hurricanes, wildfires, droughts, and floods impose a substantial financial toll on households and businesses alike. The physical effects of climate change along with associated transition costs pose significant risks to the U.S. economy and the U.S. financial system.
In 2021, the United States experienced 20 separate billion-dollar weather and climate disaster events, which caused an estimated $153 billion in damage. Overall, 2021 was the third most costly year on record for these types of events and it was the seventh consecutive year in which 10 or more billion-dollar weather and climate disaster events have occurred in the United States. In 2022, there were an estimated 15 billion-dollar disaster events making it the eighth straight year with 10 or more billion-dollar disaster events. Together, these events caused an estimated $165 billion in damage.
Climate-related financial risks can be grouped into two broad categories—physical risk and transition risk. Physical risk refers to harm to people and property caused by discrete, climate-related events like hurricanes, wildfires, and heatwaves, as well as longer-term, chronic phenomena, including changes in precipitation patterns, sea level rise, and higher average temperatures. Transition risk refers to stress on institutions or sectors caused by measures taken to move towards a less carbon-intensive economy. This includes responding to public policy changes, adopting new technologies, and adapting to shifts in consumer and investor preferences, which may lead to higher costs and substantial shifts in asset values. If these changes occur in a disorderly fashion, the effect on individuals, businesses, communities, and financial institutions could be sudden and disruptive.
Economic and financial disruptions and uncertainties arising from both the physical and transition risks could affect the credit union industry across many dimensions. Climate-related physical and transition risks tend to manifest as traditional financial risks, including credit risk, liquidity risk, market risk, and operational risk. For example, disruptions in economic activity caused by climate-related weather events like flooding or wildfires may affect household income and the ability to stay current on household financial obligations. The property damage associated with such events could affect the value of homes and the mortgages collateralized by residential real estate. These events pose similar risks to businesses and mortgages collateralized by commercial real estate.
The policy and technological changes needed to reduce the environmental impact of human activities and move towards a less carbon-intensive economy may also have a wide range of effects on the economy, businesses, consumers, and thus credit unions. For instance, the collateral value of motor vehicles may be affected as consumer preferences shift from gasoline-powered vehicles to electric and hybrid vehicles. Efforts to reduce greenhouse gas emissions could lead to significant adjustments in sectors of the economy that are greenhouse gas-intensive, including the energy, transportation, manufacturing, and agricultural sectors. Such adjustments may create new business opportunities, such as the creation of biodiesel products. Households, businesses, and credit unions with direct or indirect ties to these sectors would also be affected. Thus, any weaknesses in how a credit union identifies, measure, monitors, and mitigates physical and transition risks could adversely affect a credit union's safety and soundness.
Credit unions need to consider climate-related financial risks, and how they could affect their membership and institutional performance. For instance, a credit union's field of membership is often tied to a particular industry or community. To remain resilient and retain the ability to offer their members access to safe, fair, and affordable financial services, credit unions may need to consider adjustments to their fields of membership as well as the types of loan products they offer.
Low-income and minority communities are particularly vulnerable to climate-related financial risk. Climate-related disasters can cause property damage and can also lead to job losses and undermine economic output, reducing already limited household income and wealth and diminishing access to capital. Additionally, absent any mitigating actions, changes in government policy, programs, or guidelines to transition to a less carbon-intensive economy may unintentionally increase the cost of homeownership in vulnerable communities. Financially vulnerable households and communities are the least able to absorb the costs associated with climate-related disasters, so these consumers may have more difficulty adapting to changes in government policies and the natural environment. Thus, climate-related financial risks may be amplified for FICUs serving these communities.
Climate change presents several complex conceptual and practical challenges not only for credit unions, but also for the NCUA. Just as credit unions must continue to adapt to account for climate-related financial risks, the NCUA will need to evolve its understanding of the impact on credit unions, credit union members, the credit union system, and the SIF. The information collected from the responses to the questions below will assist the agency in developing tools to identify and assess current and future risks to FICUs and the SIF. Stakeholder feedback will also inform the agency's future decisions on the best way to address these risks. And, the responses of interested parties will allow the agency to better understand how credit union members may be affected by these risks.
The Board seeks comments on the current and future climate and natural disaster risks faced by FICUs. The NCUA is broadly interested in understanding stakeholders' views and experiences in this area. Commenters are also encouraged to discuss any and all relevant issues they believe the Board should consider with respect to the financial risks associated with climate change. This includes, but is not limited to, risks posed to, or stemming from, field of membership, lending, investments, other assets, deposits, underwriting standards, insurance coverage, liquidity, and capital.
The Board's request for information should not imply any intention to modify any existing requirements applicable to FICUs and does not grant FICUs any new authorities or limit any existing authorities. The request for information does not speak to the permissibility or impermissibility of any specific activity. Additionally, any information provided by credit unions as part of this RFI will not be used in the examination and supervision of individual credit unions. Any new requirements for credit unions associated with climate-related financial risk would require changes to examination and supervision procedures and Board action and approval before implementing.
Moreover, as a prudential financial regulator, the NCUA does not have expertise in climate science. As set forth in the questions below, the NCUA is seeking input that would strengthen its ability to identify and assess credit unions' current and future climate and natural disaster risk. The NCUA is also seeking input on opportunities to enhance the agency's supervision and regulation of each regulated entity's management of such risks. . . .