Acting Comptroller of the Office of the Comptroller of the Currency, Michael Hsu has announced plans to address climate change risk regulation with high level framework guidance and five “range of practices” questions for large-bank boards.
“Bank boards have a critical role to play in turning words into action and, in doing so, can be a strong force for good. In board meetings, the questions that directors ask senior managers can shift bank priorities, reveal hidden strengths, expose fatal weaknesses, and spur needed changes,” said Hsu.
The guidance features five questions that banks must ask themselves. These include a bank’s overall exposure to climate change, the counterparties, sectors or locales that warrant heightened attention, exposure to a carbon tax, vulnerability of data centers and other critical services to extreme weather, and how the bank can position itself to seize opportunities from climate change.
The questions are intended to spur conversations at the board level with management and to inform more detailed guidance that is likely to be developed in 2022.
Hsu has taken a data-driven approach to understanding the financial risks and opportunities posed by climate change and the transition to a lower-carbon economy.
He also noted that each bank is unique with different customers and business lines, and that it is important to ensure that any consideration of climate risk as a supervisory issue is appropriate and tailored, based on the size, complexity, and location of the institution.
The detailed guidance will build on a range-of-practices review that will launch this week, along with industry and climate groups’ input and lessons from other jurisdictions.
Examination based upon the guidance will follow after the more detailed guidance in 2022, and a focus on midsize and smaller bank risk will follow after that.
The guidance follows the Financial Stability Oversight Council’s first report on climate-related financial risk which stated that climate change was an emerging threat to the financial stability of the US in October.