Include climate risk in 2022 bank exams, OCC urged

US regulators should include climate risk in their bank examinations without delay, two leading think tanks have said. They warn failure to do so will mean it could be years before crucial lessons from the process are learned.

The Office for the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) are both working on draft guidance and principles on climate risk management for banks, likely to be finalised later this year. The Federal Reserve is expected to follow suit with its own set of principles in due course.

But although the OCC comptroller has confirmed there will be a cross-agency effort to test the climate risk management capabilities of large banks, none of the agencies have given a firm timeline for when such assessments will be introduced. The OCC examines banks roughly every 12-18 months, and a new report says it should seize the initiative by including a module on climate risk this year.

The paper, published by Public Citizen and the Roosevelt Institute, says examinations can help gather updated, granular data about a bank’s business – tools that regulators use to inform and improve their own models of how climate risk will affect banks. The authors say regulators should publish supervisory insights from the first set of exams within six months of completion. For the OCC, this would mean publishing such findings by the end of 2022.

The European Central Bank (ECB) assessed banks’ performance against its own guidance on the disclosure of climate risk in 2020 and again in 2021. It published a report on banks’ performance earlier this year, which found that although they had made progress over that time, none of the 109 lenders it oversees met its expectations.

Executive board member Frank Elderson later threatened to name and shame institutions that repeatedly fell short of the ECB’s standards.

The researchers from Public Citizen and the Roosevelt Institute say that like the ECB, the OCC and its counterparts should reveal the percentage of banks that are taking climate risk into account, the number who have identified material climate risks, and the best practices that examiners have seen for identifying and managing those risks. They argue these findings should then be used to update examination manuals, including with key indicators that examiners will look for when they assess lenders’ portfolios.

The recommendations form part of a broader appraisal of the crucial role that safety and soundness supervision can play in addressing climate risks to financial institutions. Although both of the organisations behind the paper have previously advocated the proactive use of regulatory interventions such as climate-adjusted capital requirements, the authors highlight the value of supervision in rapidly improving banks’ practices.

“Regulators can effectively use supervision to quickly direct banks away from excessive climate-related risks, without the delays and political compromises inherent in legislation, rulemaking, or enforcement litigation,” says the paper.