While several federal regulatory agencies are working to finalize proposals on climate-related financial risk management that purportedly target the nation’s largest financial institutions, the proposals would inevitably subject community banks and the communities they serve to new and expensive regulatory burdens. Rather than rush to impose new standards on community banks, the agencies must ensure their climate risk regulatory efforts mitigate the downstream costs their proposals will impose on community banks and the communities they serve.

New climate risk regulations would require some community bank customers to collect and disclose greenhouse gas emissions data as a condition of banking. The proposals also would require community banks to pay myriad expenses to comply with climate risk management frameworks – including hiring subject matter experts and compliance specialists to implement these complicated frameworks. Ultimately, these proposals would cut off local communities from the community banks that best understand and best serve local environments.

Community banks have decades of experience managing concentration risks and responding to extreme weather events and natural disasters in their communities — meaning new, onerous, and expensive climate risk management frameworks are counterproductive. Federal Deposit Insurance Corp. Acting Chairman Martin Gruenberg recently noted community bank risk management strategies — which are based on firsthand perspectives and experiences — include consulting weather, agricultural, and other non‑financial data; managing exposures within flood plains; and assessing the impact of extreme weather events. But Gruenberg’s call for regulators not to have “unreasonable expectations” for small and midsize banks contrasts with the series of proposals the FDIC and other regulators are working to finalize in the months ahead.

For instance, the Securities and Exchange Commission’s proposal to institute climate-related investor disclosures contains no exemption for community banks, threatening to impose unprecedented costs and potential liabilities that would drive local institutions out of the public capital markets. While separate climate risk management frameworks proposed by the FDIC and Office of the Comptroller of the Currency would target banks over $100 billion in assets, regulators have signaled the policies will ultimately trickle down to community banks. Gruenberg himself said in releasing the FDIC framework that all financial institutions are subject to climate-related financial risks, and Acting Comptroller of the Currency Michael Hsu has said OCC examiners will conduct climate risk management examinations on community banks in the coming years.

Regulators should not impose climate risk regulations on community banks for the following reasons:

First, current risk management practices protect community banks from climate-related financial risks, as evidenced by the absence of community bank failures following severe weather events. As Gruenberg noted, community banks have employed a range of risk management strategies for generations and know their communities and loan portfolios better than anyone else. Rather than impose new climate-related guidelines on community banks, regulators should continue to utilize existing and effective risk management supervision practices, which will avoid duplicating requirements and introducing new regulatory burdens.

Second, the FDIC, OCC, and SEC published their proposals without any supporting studies to demonstrate climate risk is a threat to bank safety and soundness, raising questions about the validity of their assumptions. Before contemplating new policies, the agencies should first conduct studies and gather empirical data to determine the extent to which climate-related financial risks affect the safety, soundness, and stability of community banks and the financial system.

The lack of empirical data points to the third key concern with these proposals — that the government’s ultimate motive is to choke off legal but disfavored businesses and industries from the financial system. While community banks typically are not the primary source of financing for large energy-producing companies, they do provide the majority of small-business credit in communities in which energy production, refinement, agriculture, and transportation businesses exist. Reintroducing the “Operation Choke Point” policy of using the financial system to target industries disfavored by certain policymakers not only plays favorites between legal industries, it threatens to harm many local economies that community banks serve. If climate risk proposals are not intended to choke off specific industries from the financial system, regulators should expressly state there is no supervisory expectation that banks de-risk legal but climate-disfavored industries.

Sustainability is central to community banks’ business model with their longstanding underwriting and insurance practices addressing the impact of severe weather events and natural disasters since the early 19th century. When local environments flourish, community banks flourish. But subjecting community banks to mandatory climate risk regulation or enhanced climate-disclosure requirements is unnecessary and would only restrict their ability to meet their communities’ needs. Regulators should reconsider their climate risk proposals and their adverse effects on local communities.