On April 25, 2023, the National Credit Union Administration (“NCUA”) requested comment (the “RFI”) on how climate and natural disaster risks may affect federally insured credit unions, their members, and the National Credit Union Share Insurance Fund (“NCUSIF”).1 The issuance of the RFI is particularly notable because credit unions, almost universally smaller than banks, may not have anticipated that the NCUA would focus on this risk at this time since banking regulators are not focusing on this risk for small banks.
The RFI indicates that the NCUA may use the results of the RFI to develop regulatory and reporting requirements and supervisory expectations for credit union management of climate-related financial risks. While it does not foreshadow the specific contours of these obligations, credit unions should look at the actions of the federal banking regulators, New York Department of Financial Services, and Task Force on Climate-related Financial Disclosures as examples of what the NCUA might impose.2
The NCUA will accept responses to the RFI through June 26, 2023. In this Legal Update, we provide background on the NCUA and discuss the RFI.
A credit union is a financial institution owned by its members and offering them a range of financial products and services, including deposit accounts and loans. Credit unions in the United States are nonprofit entities that function like a cooperative. The NCUA is the primary regulator of federally chartered credit unions and has substantial supervisory influence over most state-chartered credit unions through its operation of the NCUSIF.3
Most credit unions are small, locally focused financial institutions. Credit unions typically serve and focus their attention on a defined, limited field of membership, such as residents of certain counties, employees of certain employers or labor unions, or adherents of certain religious denominations. Only one credit union has assets in excess of $100 billion, and over 99% of credit unions have less than $10 billion in assets. Generally, credit unions may offer financial products to small businesses but typically do not engage in commercial banking or capital markets activities.
The NCUA states that credit unions should consider climate-related financial risks and how they could affect their membership and financial performance. It explains that low-income and minority communities are particularly vulnerable to climate-related financial risk because climate-related disasters can cause property damage and 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. To address these risks, the NCUA intends to develop tools to identify, assess, and mitigate climate-related financial risks to federally insured credit unions and the NCUSIF.
To inform the NCUA’s actions, the RFI poses a total of 38 questions in 11 categories:
- Physical risk
- Transition risk
- Business strategies
- Risk management
- Reporting and targets
- Climate-related opportunities
- Suggestions for NCUA
- Data gathering
- Questions for NCUA
The questions generally are broad and imply that the NCUA will expect credit unions to comprehensively address climate change across their operations. Each question is action-oriented, and the wording seems to assume that all credit unions will need to implement extensive climate risk management practices.
The questions in the RFI are notable in at least three respects.
No Size Threshold Given
First, the NCUA does not mention the size of a credit union as a consideration for how it will attempt to regulate climate risk management practices. The federal banking regulators have indicated that they will focus almost exclusively on banks with more than $100 billion in assets when considering climate-related financial risks. It makes some sense that the NCUA would not adopt this threshold because it would cover only one credit union, but the omission of any threshold calls into question how smaller credit unions will be expected to respond. If banking regulators recognize that smaller banks currently lack the resources to manage climate-related financial risk (or that climate-related financial risk may not be material for these banks), one must wonder why the NCUA thinks smaller credit unions should be in scope.
No Mention of Other Frameworks
Second, the NCUA does not mention the principles for managing exposures to climate-related financial risks issued by the Basel Committee on Banking Supervision and proposed by the federal banking regulators.4 Nor does the NCUA mention the frameworks for calculating and reporting climate information that have been issued by the Task Force on Climate-related Financial Disclosures and proposed by the US Securities and Exchange Commission.5 While credit unions have their own operational eccentricities, they are financial institutions that provide traditional banking services. One would expect the NCUA to leverage the approaches used by other regulators to increase comparability and reduce compliance burden. Hopefully, the NCUA will address these omissions in subsequent proposals regarding climate risk management.
Short-circuiting the Risk Management Process?
Third, the RFI asks if credit union boards and management “believe climate change is a material risk” to their business. This phrasing may imply that the NCUA will expect credit unions to affirmatively demonstrate any basis for determining that climate-related financial risk is not material to their business. However, requiring institutions to prove that a risk is not material short-circuits the risk management process by eliminating the risk identification and assessment phases. Therefore, it would seem preferable for the NCUA to allow credit unions to use existing risk identification and assessment processes to identify the circumstances in which climate-related financial risk is material.
1 88 Fed. Reg. 25,028 (Apr. 25, 2023), https://www.federalregister.gov/documents/2023/04/25/2023-08715/climate-related-financial-risk.
2 See our Legal Update on the New York proposal (https://www.mayerbrown.com/en/perspectives-events/publications/2023/01/climate-risk-management-vscommunity-development-lendingnydfs-wants-its-banks-and-mortgage-companies-to-do-both).
3 A small number of state-chartered credit unions are insured by private insurers.
4 See our alerts on the Basel Committee principles (https://www.mayerbrown.com/en/perspectives-events/publications/2022/06/climate-risk-management-principles-finalized-by-basel-committee) and US proposals (https://www.mayerbrown.com/en/perspectives-events/publications/2022/12/climaterelated-risk-management-principles-released-by-us-federal-reserve).
5 See our alert on the SEC proposal (https://www.mayerbrown.com/en/perspectives-events/publications/2022/03/sec-proposes-climate-change-disclosure-rules-applicable-to-public-companies).
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