New York State Department of Financial Services (NYDFS) Issues Climate-Related Risk Guidance

New York State Department of Financial Services (NYDFS) Issues Climate-Related Risk Guidance

In recognition of the significant and evolving risks posed by climate change to the financial sector, the New York State Department of Financial Services (NYDFS) has issued comprehensive guidance to its regulated institutions. The guidance, released on October 29, 2020, emphasizes the importance of integrating both financial and operational risks from climate change into governance frameworks, risk management processes, and business strategies.

The guidance is designed to support efforts by regulated institutions, including banking organizations, licensed branches and agencies of foreign banking organizations, and mortgage bankers and servicers, in assessing and managing their material climate-related financial and operational risks. NYDFS encourages a proactive and iterative approach to building capacity for risk assessment and management, leveraging evolving methodologies and improved data availability.

Key Points from the NYDFS Guidance:

  1. Scope and Applicability: The guidance applies to New York State-regulated banking organizations, licensed branches and agencies of foreign banking organizations, and regulated mortgage bankers and servicers.
  2. Risk Assessment and Management: Regulated organizations are advised to assess and manage material financial and operational risks related to climate change in the context of risk assessment, risk management, and risk appetite setting. Due to the developing nature of the quantification of these risks, organizations are urged to periodically reassess materiality assumptions.
  3. Operational Resilience: Emphasis is placed on the safety and soundness of regulated organizations, and the guidance advises them on how to incorporate climate-related risks into their existing risk management frameworks while ensuring operational resilience.
  4. Proportionate Approach: The guidance acknowledges that climate change may affect organizations differently based on factors such as size, complexity, and geographic distribution. Regulated organizations are encouraged to adopt a proportionate approach in managing climate-related financial risks.
  5. Fair Lending Considerations: NYDFS highlights the disproportionate impact of climate change on low- and moderate-income communities and communities of color. Regulated organizations are reminded of their obligations under fair lending laws and other consumer protection laws and are encouraged to mitigate disproportionate impacts.
  6. Implementation Timeline: While progress in implementing the guidance is encouraged, NYDFS has not established a specific implementation timeline. Coordination with state, federal, and international counterparts on climate-related supervision will continue.

The guidance underscores the importance of integrating climate-related risks into the overall risk management framework, consistent with the approach of other prudential regulators. As climate-related financial and operational risks continue to evolve, NYDFS aims to ensure that regulated institutions are well-prepared to navigate these challenges while upholding their commitments to safety, soundness, and fair lending principles.

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