WASHINGTON — Bank boards should turn up the heat on senior managers to gauge their institutions’ vulnerability to climate change, said the head of the Office of the Comptroller of the Currency.
In a speech Monday, acting Comptroller Michael Hsu made one of the most direct appeals yet by a prudential regulator on the need for bank leaders to assess climate-related risks.
He said board directors can accelerate the process by asking senior managers five questions to assess an institution's progress.
Boards should inquire about a bank's “overall exposure to climate change,” as well as more granular and tangible risks, such as specific business sectors or locations that banks should more closely monitor, Hsu said.
“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 board meetings, the questions that directors ask senior managers can shift bank priorities, reveal hidden strengths, expose fatal weaknesses, and spur needed changes.”
He said board members should also determine how well their bank is evaluating the impact of a theoretical carbon tax, the physical vulnerabilities from data centers and other bank facilities impacted by extreme weather, and where business opportunities are in an economy transitioning away from fossil fuels.
Hsu put special emphasis on the importance of climate scenario testing — a version of bank stress testing without direct implications for capital requirements. Hsu said that bank boards should “push senior management hard to develop scenario analyses.”
“Banks can and should engage in what I call ‘small s’ scenario testing — that is, asking more granular ‘what if?’ questions that directly affect parts of a bank’s portfolio,” Hsu said in his speech. “These bottom-up questions can be done more quickly, can illuminate material exposures (and data gaps), and can help build the climate risk management muscles that will be needed for large banks to succeed long term.”
His remarks come as regulators across the U.S. financial system explore potential supervisory frameworks to monitor how well banks are developing climate risk management models. Hsu recently said the OCC is working on guidance that it expects to issue by the end of this year.
Hsu acknowledged that banks’ management teams may be ill-equipped at the moment to answer every question he outlined. “Given the early state of play, boards should not be surprised to hear management respond, ‘We don’t know,’ to some, if not all, of the questions,” the acting comptroller said.
But Hsu also made clear that bank supervisors would be sharpening their expectations for climate risk awareness in the coming months and years.
“By this time next year, management teams hopefully should be able to answer these questions with greater accuracy and confidence,” Hsu said. “The journey to get there will require large banks to build up their climate risk management and reporting capabilities. The OCC will help along the way.”
Hsu told reporters after the speech that the five questions banks boards should ask executive were intended to encourage bank leadership to take the initiative on assessing their own climate risk.
“One thing I’ve noticed is that today, what I’m hearing from banks is, ‘Just tell me what to do,’ ” Hsu said. “That’s a kind of capitulation.”
Hsu also said he wanted to “caution” banks about relying too heavily on regulator guidance to determine their exact approach on climate risk.
“The best thing that banks can do is ask themselves, ‘What are our exposures? Where are our gaps? How can we improve?’ and to share” those findings with bank regulators, Hsu said. “There's a lot of devilish details, and banks are good at risk management. This is something they're good at, and so we want them to use those muscles, develop something good and learn from each other.”
In July, Hsu announced that the agency would join the Network for Greening the Financial System and was appointing a chief climate risk officer. Last week, Hsu announced that large national banks should expect
