US Regulator Discovers Banks Need to Address Climate Risk, Sources Report

By Isla Binnie and Nupur Anand

A leading U.S. banking regulator has determined that major financial institutions are only beginning to evaluate and manage the risks posed by climate change, and substantial improvements are necessary in several areas, according to sources familiar with the situation.

Last year, the Office of the Comptroller of the Currency (OCC) conducted a review involving 22 large banks to assess how they account for the impacts of climate change on their lending portfolios and overall operations.

Recently, the OCC communicated in a letter to the banks’ chief executives that while all institutions have engaged in some level of risk identification, their strategies and levels of development exhibit considerable variation. This information, which has not been publicly disclosed before, highlights the deficiencies regulators have identified in banks’ readiness to handle climate risks. Experts assert that these shortcomings could put trillions in assets at risk.

The OCC’s findings revealed that most banks are still in the preliminary stages of integrating climate-related risk into essential functions such as strategic planning, internal auditing, and evaluations of their risk tolerance. Moreover, several banks have yet to embark on climate scenario analysis or to effectively implement their planned governance frameworks for addressing climate risks.

An OCC representative stated that the agency does not comment on supervisory matters, and the individuals discussing this information requested anonymity due to its confidential nature.

Globally, banks and regulators are facing challenges in quantifying and managing the impacts of climate change and shifts in energy policies on the financial landscape. However, some industry leaders question whether the gradual nature of climate change presents the same immediate threat to financial stability as economic downturns do.

In 2023, the OCC completed its first comprehensive review, involving numerous meetings with banks, and released guidance on risk management in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve. The Fed also conducted its own exercise, in which the largest six banks were asked to simulate the potential effects of extreme weather events and a transition to cleaner energy on their assets and investment portfolios.

The OCC’s letter outlined various observations regarding current practices but did not specify particular actions for the banks to undertake. The agency indicated that it would continue to engage in risk-based supervisory activities.