Learn from US failings to maintain confidence in smaller banks

IN THE aftermath of Silicon Valley Bank’s (SVB) collapse, small and mid-sized banks across the US are increasingly viewed as riskier than large banks. Regulators are a key cause of this perception. Large banks are perceived as “too big to fail” and, since their failures could cause widespread financial instability, they are subject to more stringent regulation. Some regulations, including critical guidance from federal bank regulators on managing climate risk, only apply to banks with more than US$100 billion in assets. This needs to change.

To restore consumer confidence in small and mid-sized banks, regulators need to supervise and regulate them on all types of risk, including climate change. Small and mid-sized bank portfolios are naturally more concentrated than large bank portfolios, which can increase small banks’ exposure to climate-related risks.

A report by the National Credit Union Administration and another by Ceres’ credit union both found significant exposure to physical climate risk among credit unions. Rising sea levels and more extreme storms have already led to the closure of two Louisiana credit unions following Hurricane Katrina in 2005.