Early Assessment of Climate Risk by Major Lenders
A top U.S. banking regulator has discovered that major lenders are in the preliminary stages of evaluating and managing climate change risks to their operations. Significant improvements are needed in several areas, according to three sources familiar with the matter.
OCC Review of Climate Risk Management
The Office of the Comptroller of the Currency (OCC) conducted a review last year, assessing 22 large banks on how they account for climate change impacts on their loan portfolios and businesses. The OCC found that while all banks had undertaken some risk identification, their approaches and stages of development varied significantly.
Findings of the OCC Letter
In a recent letter to bank CEOs, the OCC revealed that all banks had started some level of risk identification. The letter, as described to Reuters, noted that many banks are still early in integrating climate risk into strategic planning, internal audits, and risk assessments. Additionally, several banks have yet to start climate scenario analysis and need significant progress on governance frameworks for climate risk.
Regulatory Oversight and Industry Response
The OCC does not comment on specific supervisory activities. Banks and global regulators face challenges in measuring and managing the financial system’s exposure to climate change and shifts in energy policy. Some industry executives question whether the long-term nature of climate change poses an immediate threat to bank stability comparable to economic recessions.
Previous OCC Actions and Future Plans
In 2023, the OCC conducted its first review and held multiple meetings with banks. It published guidance on managing risks in collaboration with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve. The Fed also conducted an exercise asking the six largest banks to simulate the impacts of extreme weather and a transition to cleaner energy on their assets.
The OCC’s letter provides observations on current practices without specifying required actions. It states that the OCC will continue to perform risk-based supervisory activities.