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Prepare Now for Climate Risk Supervision

The drumbeat signaling the advent of climate risk supervision just got louder - and while final supervisory guidance is still likely some months off, banks and fintechs should be starting to think through their risks and how they’ll address them.

In October 2021 the Financial Stability Oversight Council (FSOC) published its Report on Climate-Related Financial Risk. Using this as a jumping off point I published an article in FinLedger outlining the various efforts underway at U.S. regulatory agencies to understand the financial risks presented by climate change and to develop supervisory programs to address them. I noted that building capacity and expertise from a risk management standpoint, understanding data gaps, and taking a hard look at the robustness and quality of public disclosures are all good places to start.

Since that report was issued, Acting Comptroller of the Currency Mike Hsu delivered a speech where he outlined “Five Climate Questions Every Bank Board Should Ask”. Those questions are:

  • What is our overall exposure to climate change?

  • Which counterparties, sectors, or locales warrant our heightened attention and focus?

  • How exposed are we to a carbon tax?

  • How vulnerable are our data centers and other critical services to extreme weather?

  • What can we do to position ourselves to seize opportunities from climate change?

Like the FSOC report, this speech acknowledges the difficulty of answering these questions and suggests that at this early stage, bankers might not have great answers to the questions. Interestingly, Hsu encourages bankers to be thinking about competitive opportunities presented by climate change and ways to seize them. Overall, the speech provides a little more insight into what the OCC’s supervisory guidance might ultimately look like.

The Federal Reserve Board also published its semi-annual Financial Stability Report that acknowledges the FSOC report and discusses the Federal Reserve’s actions related to climate risk. The Fed has formed two committees – the Supervision Climate Committee and the Financial Stability Climate Committee – to help expand its capacity to assess and mitigate climate-related financial risks. These committees are focused on filling climate-related data and methodological gaps and on developing a program of climate-related scenario analysis to evaluate the potential economic and financial risks posed by different climate outcomes.

These latest two items shed a little more light on the thinking at the OCC and the Fed, both of which have stated that some type of supervisory guidance will be published in the near future. The emergence of this guidance, especially at a time when regulators acknowledge that there is great uncertainty in how to identify and mitigate climate-related financial risks, presents both opportunities and risks for financial institutions. Here at Klaros, we believe that even at this early stage, it’s clear that the momentum toward climate-related supervisory programs continues to build. Engaging early and building capacity in this area could present a great opportunity to shape what the regulatory scrutiny ultimately looks like, while waiting to engage could leave bankers on their heels, reacting to new supervisory expectations.

Image Source: Martin Snicer via Flickr


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