Hsu underscores importance of climate-risk analysis for banks

Noting that large banks are not waiting for regulators to set climate-risk management guidance, the acting head of the national bank regulator on Monday said some large banks are already exploring climate risk issues, with some distinguishing between “chronic” physical risk and “acute” physical risk.

The latter, Acting Comptroller Michael Hsu said, is typically deemed manageable, but “chronic” risk presents “novel issues, requires different modes of analysis, and may generate monre material exposures.”

Hsu made these and other points in remarks prepared for a conference of the Institute of International Bankers held Monday in Washington.

Hsu, currently the top official at the Office of the Comptroller of the Currency (OCC), pointed to a set of draft principles the agency released in December that are aimed at supporting the identification and management of climate-related financial risks for large banks with more than $100 billion in total consolidated assets. Citing a “robust” response, Hsu said his agency’s staff are reviewing the feedback and plan to work with the Federal Reserve and the Federal Deposit Insurance Corp. (FDIC) on an interagency basis to finalize the principles and develop more detailed guidance.

Meanwhile, Hsu underscored the importance of banks performing “what if?” scenario analysis, which he called “bread-and-butter risk management for banks” that “can and should be applied to climate risks in the same, objective, dispassionate way that banks approach geopolitical risk” such as that being done now for the situation Ukraine.

“With regards to the current conflict, for instance we would expect banks to be doing ‘what if’ scenario analyses of their direct and indirect exposures to Ukraine, Russia, and associated markets,” he said.

Hsu said that from a supervisory guidance perspective, the draft principles addressing climate risk that the OCC released in December offer a starting point for consideration. “Later this year we will finalize those principles and then develop more detailed guidance. Our plan is to do so on an interagency basis with the Federal Reserve and FDIC. After an appropriate transition period, we will then begin assessing large banks’ climate risk management capabilities.”

He added that it will be “a number of years” before OCC examiners conduct climate risk management examinations for midsize and community banks.

“My suggestion to those bankers has been simple: Use the time wisely. To the extent that midsize and community banks can develop thoughtful, tailored assessments of their climate risk profiles, they will help mitigate the risk of a ‘trickle down” of large bank climate risk management expectations in the future,” he said.