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WRIGHTWOOD, CALIFORNIA – As an out-of-control wildfire grew over 30,000 acres, an unknown number of homes and businesses were destroyed, and more than 80,000 people were forced to flee their homes. (Photo courtesy of Getty Images/David McNew)
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Thank you for the chance to testify before you, Chairman Perlmutter, Ranking Member Luetkemeyer, and honorable members of the subcommittee. MRV Associates’ Managing Principal is Mayra Rodriguez Valladares. I’ve worked with bankers and financial regulators in over 30 countries for over three decades on a wide variety of hazards that might jeopardize financial institutions’ safety and soundness. Scientists have been warning us about the dangers of climate change for decades, unlike the Global Financial Crisis. Having lived through multiple financial crises, I’ve learned that when someone says, “This time it’ll be different,” it’s a warning sign that immediate action is required to avert another costly crisis.
Globally systemically important banks in the United States[1] are extremely vulnerable to climate change concerns. They not only provide financial services in states that are subject to worsening climatic disasters, but they also have operations in nations that are sensitive to physical and transition hazards, such as the United Kingdom, Japan, Canada, and Mexico.
Climate change affects regional, community, and agricultural banks as well. Loan defaults and repayment issues reached a twenty-year high in 2019 due to catastrophic flooding in the Midwest. [6] Banks serving people of color[7] are particularly sensitive to climate change, as many of them are located in locations with a variety of environmental, infrastructure, and housing issues.
I should point out that the huge increase in corporate leverage in the United States over the last two decades suggests that those companies are the most likely to default if climate change affects them.
ADDITIONAL INFORMATION FOR YOU
Because financial institutions and businesses are not compelled to identify, measure, control, and monitor their climate-related risks and to disclose them to the public, market investors have not priced in climate change risks. Investors and regular Americans are at risk as a result of financial system secrecy.
U.S. regulators are already working on climate change risk frameworks as members of prominent international standard-setting bodies such as the Financial Stability Board and the Basel Committee on Banking Supervision.
Financial Stability Oversight and its Office of Financial Research in the United States should be given the human, data,[8] and technology resources they need to study how climate change is affecting the whole financial system and detect sources of systemic risk. Inaction has a high cost.
Non-banks that are exposed to climate-related risks should be the attention of the FSOC and OFR.
[9] They are linked to banks, lack adequate risk management rules, and are extremely opaque.
[10] Bank regulators can compel banks to model operational risk, which includes natural calamities that can harm a bank’s assets in both the banking and trading portfolios, under Basel III Pillar I. Banks might use climate change-related defaults or market volatility in their Internal Capital Adequacy Assessment Process (ICAAP) to assess economic capital levels to withstand unexpected losses under Pillar II.
I humbly suggest that bank regulators: 1. develop climate change stress tests or incorporate climate change scenarios into existing supervisory exercises like the Comprehensive Capital Analysis Review and the Dodd-Frank Stress Test;
2. develop specific climate change supervisory guidance for banks; 3. update supervisory bank examination manuals to include how climate change affects banks; 4. assess their human resources to see if they have enough professionals who are knowledgeable about climate science, risk data aggregation, and modeling; 5. assess if they have robust technological systems to analyze climate change.
I also propose that bank regulators require banks to: 1. conduct a gap analysis to determine what resources they need to improve risk data aggregation, climate change risk modeling, and technology; 2. incorporate physical and transition risks into their enterprise-wide risk management frameworks and long-term financial plans to measure their climate risk exposures; and 3. include physical and transition risks in their bank’s risk management frameworks and long-term financial plans to measure their climate risk exposures.
4. Use Basel III’s Pillar III Disclosures to make climate change model results, including tail risks, public.
I eagerly await your inquiries, and I would be delighted to serve as a resource for you as you continue to investigate how to mitigate the negative effects of climate change on the financial system’s safety and soundness in the United States.
Witnesses are given a five-minute time limit to give their testimony. Ms. Hilary Allen, Dr. Rachel Cleetus, Mr. Steven Rothstein, and Dr. Clifford Rossi were the other witnesses, all of whom had links to their written testimonies. My written testimony can be found here. The hearing before the Subcommittee on Consumer Protection and Financial Institutions can be viewed at this link.
[1] Financial Stability Board’s 2020 List of Globally Systemically Important Banks (G-SIBs).
[2] “How does Climate Change Affect Us?” United Kingdom’s Met Office.
[3] Climate Action Tracker, Japan, 2020.
[4] Government of Canada, ‘Climate Change.’
[5] United Nations Development Programme, “Mexico, Climate Change Adaptation.”
[6] Federal Reserve Bank of Chicago, ‘AgLetter,’ August 2019.
[7] Christopher Flavelle and Kalen Goodluck “Again, Native Americans are disproportionately affected by climate change,” according to “Dispossessed.” On June 27, 2021, The New York Times published an article.
[8] Mayra Rodriguez Valladares, Mayra Rodriguez Valladares, Mayra Rodriguez Valladares “Mr. President, the Data is Mightier Than the Sword,” On the 15th of August, 2018, The Hill published an article.
[9] Public Citizen and Americans for Financial Reform, “Climate Roadmap for Financial Regulation,” April 2021.
Mayra Rodriguez Valladares, Mayra Rodriguez Valladares, Mayra Rodriguez Valladares, Mayra Forbes, February 4, 2019, “Market Participants and Regulators Should Be More Vigilant on Non-Banks.”/nRead More

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