Boards ought to drive banks’ local weather danger efforts: OCC chief

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WASHINGTON — Financial institution boards ought to flip up the warmth on senior managers to gauge their establishments’ vulnerability to local weather change, mentioned the top of the Workplace of the Comptroller of the Forex.

In a speech Monday, performing Comptroller Michael Hsu made some of the direct appeals but by a prudential regulator on the necessity for financial institution leaders to evaluate climate-related dangers.

He mentioned board administrators can speed up the method by asking senior managers 5 inquiries to assess an establishment’s progress.

Boards ought to inquire a couple of financial institution’s “general publicity to local weather change,” in addition to extra granular and tangible dangers, corresponding to particular enterprise sectors or areas that banks ought to extra intently monitor, Hsu mentioned.

“Financial institution boards have a essential function to play in turning phrases into motion and, in doing so, could be a robust pressure for good,” Hsu mentioned. “In board conferences, the questions that administrators ask senior managers can shift financial institution priorities, reveal hidden strengths, expose deadly weaknesses, and spur wanted modifications.”

He mentioned board members must also decide how nicely their financial institution is evaluating the affect of a theoretical carbon tax, the bodily vulnerabilities from information facilities and different financial institution services impacted by excessive climate, and the place enterprise alternatives are in an economic system transitioning away from fossil fuels.

Hsu put particular emphasis on the significance of local weather state of affairs testing — a model of financial institution stress testing with out direct implications for capital necessities. Hsu mentioned that financial institution boards ought to “push senior administration onerous to develop state of affairs analyses.”

“Bank boards have a critical role to play in turning words into action and, in doing so, can be a strong force for good,” said acting Comptroller of the Currency Michael Hsu.

“Financial institution boards have a essential function to play in turning phrases into motion and, in doing so, could be a robust pressure for good,” mentioned performing Comptroller of the Forex Michael Hsu.

Bloomberg Information

“Banks can and may interact in what I name ‘small s’ state of affairs testing — that’s, asking extra granular ‘what if?’ questions that instantly have an effect on components of a financial institution’s portfolio,” Hsu mentioned in his speech. “These bottom-up questions may be performed extra rapidly, can illuminate materials exposures (and information gaps), and will help construct the local weather danger administration muscle tissues that shall be wanted for giant banks to succeed long run.”

His remarks come as regulators throughout the U.S. monetary system discover potential supervisory frameworks to watch how nicely banks are growing local weather danger administration fashions. Hsu not too long ago mentioned the OCC is engaged on steerage that it expects to challenge by the top of this yr.

Hsu acknowledged that banks’ administration groups could also be ill-equipped in the intervening time to reply each query he outlined. “Given the early state of play, boards shouldn’t be shocked to listen to administration reply, ‘We don’t know,’ to some, if not all, of the questions,” the performing comptroller mentioned.

However Hsu additionally made clear that financial institution supervisors can be sharpening their expectations for local weather danger consciousness within the coming months and years.

“By this time subsequent yr, administration groups hopefully ought to be capable to reply these questions with better accuracy and confidence,” Hsu mentioned. “The journey to get there would require giant banks to construct up their local weather danger administration and reporting capabilities. The OCC will assist alongside the way in which.”

Hsu advised reporters after the speech that the 5 questions banks boards ought to ask govt have been meant to encourage financial institution management to take the initiative on assessing their very own local weather danger.

“One factor I’ve observed is that immediately, what I’m listening to from banks is, ‘Simply inform me what to do,’ ” Hsu mentioned. “That’s a form of capitulation.”

Hsu additionally mentioned he needed to “warning” banks about relying too closely on regulator steerage to find out their actual strategy on local weather danger.

“The very best factor that banks can do is ask themselves, ‘What are our exposures? The place are our gaps? How can we enhance?’ and to share” these findings with financial institution regulators, Hsu mentioned. “There’s plenty of devilish particulars, and banks are good in danger administration. That is one thing they’re good at, and so we wish them to make use of these muscle tissues, develop one thing good and be taught from one another.”

In July, Hsu introduced that the company would be a part of the Community for Greening the Monetary System and was appointing a chief local weather danger officer. Final week, Hsu introduced that enormous nationwide banks ought to count on “high-level” local weather danger steerage from the OCC by the top of 2021.

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