The Office of the Comptroller of the Currency (OCC) followed through Thursday on its promise to lay out a framework of expectations by the end of the year regarding how banks with more than $100 billion in assets should manage climate risk.
The agency asked for feedback by Feb. 14 on how it could improve the guidance and what challenges banks face in implementing the "draft principles" the OCC put forth.
Many of the principles are of the 10,000-foot variety: The regulator asked banks to define their physical risks from climate change, as well as the consequences of transitioning to a greener business model.
It also asked financial institutions to delineate bank management’s responsibilities from those of the board when incorporating climate risk.
The OCC said it plans to elaborate later with specific guidelines tailored to banks’ more granular differences.
Still, Thursday’s release makes the OCC the first federal banking regulator to put its climate risk-related expectations in writing. At the state level, New York’s Department of Financial Services in October 2020 called on state-regulated financial institutions to integrate climate change-related financial risks into their business strategies, risk management processes and governance frameworks.
"Today’s release takes an important, concrete step towards ensuring the safety and soundness of large banks in the face of increasing risks from climate change," the OCC’s acting chief, Michael Hsu, said in a press release Thursday. "We look forward to the feedback and to working with our interagency peers to develop more detailed guidance next year."
The Federal Reserve will also review comments on the OCC’s draft as part of the interagency effort, a spokesperson for the central bank told American Banker.
"A consistent approach across bank regulatory agencies will best support the effective management of these risks," the spokesperson said. "The Federal Reserve is committed to ensuring that supervised firms have strong risk management capabilities to promote their resilience to all risks, including climate-related financial risks."
Bank boards should understand how climate risks could evolve over various time horizons and scenarios, the OCC said. Management, meanwhile, should manage climate risks and their effects on the bank’s financial condition.
Boards and management both should consider banks’ exposure to climate-related risks when setting business strategy, risk appetite, and financial, capital and operational plans, the regulator said, adding they should consider the potential financial impact of climate change on stakeholders’ expectations, the bank’s reputation, and low- to moderate-income communities.
The regulator’s draft principles list tools and approaches for measuring and monitoring exposure, including heat maps, climate risk dashboards and scenario analysis. The OCC also urges that banks lean on relevant, accurate and timely data and perform climate scenario analysis that is separate from regular stress testing.
Bank boards and management should also consider climate-related financial risks as part of the underwriting and ongoing monitoring of portfolios, and assess whether those risks could affect liquidity buffers, the OCC said.
Hsu last month took pains to include board members in banks' climate risk development process, suggesting several lines of questioning they could pursue to pressure bank executives to follow through on climate risk promises.
"Bank boards have a critical role to play in turning words into action and, in doing so, can be a strong force for good," Hsu said in November. "The questions that directors ask senior managers can shift bank priorities, reveal hidden strengths, expose fatal weaknesses, and spur needed changes."
Among federal bodies, the Securities and Exchange Commission (SEC) is also developing a framework for regulating climate disclosures. The uptick in climate-related considerations comes after the Financial Stability Oversight Council issued a report in October labeling climate change an "emerging threat."