Senior Deputy Comptroller for Large Bank Supervision Testifies on Climate-Related Financial Risks

The Office of the Comptroller of the Currency (OCC) has released a latest testimony of Greg Coleman, Senior Deputy Comptroller for Large Bank Supervision, before the Sub-Committee on Financial Institutions and Monetary Policy of the U.S. House of Representatives. In this testimony, the Deputy Comptroller outlines the key activities, the OCC has engaged in in the past one or two years as regards the supervision of (large) banks with respect to climate-related financial risks. The key activities and initial supervisory findings are briefly outlined below.
#### OCC activities in relation to the supervision of large banks concerning climate-related financial risks
(1) Foster understanding of key responsibilities of large (and small) institutions as regards climate-related financial risks: The OCC has raised awareness of the potential risks associated with „increased frequency, severity, and volatility of weather events“. It has made clear that such events can have significant effects on financial assets of institutions and thus on their balance sheet and on the creditworthiness of customers. Therefore, the consideration of both physical and transitional risks in banks‘ risk management practices is indispensable.
(2) Creation of a new office within the OCC: The OCC has established a new office, the so-called Office of Climate Risk (OCR), whose main responsibilities include the following:
– Supervision of Large Banks: The OCR collaborates with the team in Large Bank Supervision to develop and review examination strategies and guidance specifically concerning climate-related financial risks. This applies to banks that have over $100 billion in total consolidated assets, ensuring that these institutions are adequately addressing climate risks in their operations.
– Training and Education: The OCR is responsible for developing initial training and curricula to educate OCC staff about climate-related financial risk supervision. This ensures that OCC staff is equipped with the necessary knowledge and tools to effectively monitor banks‘ practices as regards the identification, assessment, and management of climate risks within the banking sector.
– Interagency Collaboration: The OCR actively promotes collaboration and knowledge sharing on climate-related financial risk issues with other relevant government agencies.
(3) Issuance of Draft: Principles for Climate-Related Financial Risk Management for Large Banks: The OCC has published a first version of bespoke principles to assist large U.S. banks in their assessment and in their development of prudent risk management policies to mitigate financial risks arising from climate change. The document covers a large variety of issues, ranging from the adoption of adequate policies and procedures at governance level, to the detailed analysis of the consequences of climate change on credit risk, counterparty risk, or liquidity risk, to name a few. The document also addresses issues such as data sources, data quality, and methods used to assess those risks and ways to properly report on the assessment (both formal and timing aspects).
#### Initial supervisory observations
As large banks are concerned, the OCC confirms that institutions are taking initiatives to incorporate climate-related financial risks in their risk management practices and on understanding the impacts of these risks on firms‘ financial and risk situation. In fact, some institutions have begun to consider climate-related financial risks at a strategic planning level and incorporate such risks in their risk appetite statements. Very few have even incorporated quantitative metrics in those statements.
Furthermore, the OCC found that large banks are at different points in the process of developing methods to assess and track potential exposures to physical and transition risks, thereby employing a mix of internal and external data from diverse sources to detect, quantify, monitor, and manage these risks.
Additionally, some of the more „mature“ banks have gone beyond basic risk assessments and have conducted forward-looking scenario analyses to gain a deeper understanding of climate-related financial risks. However, it seems that the primary use of the output from these analyses is for informational purposes as banks continue to learn about the results and assess the quality of the data before fully incorporating it into their business decision-making processes.
As far as small community banks are concerned, the OCC notes that community banks „are very familiar with the impacts of weather events upon their customers and businesses in the local communities they serve. These banks have long managed the risks that localized weather events present.