January 14, 2022 - In December, the OCC released draft supervisory principles on climate risk – the first of its kind for a federal banking agency. As previously reported, last fall, the Acting Comptroller of the OCC indicated that supervisory principles were in the offing while stating that climate change poses significant risks to the financial system.
The draft principles – which would apply to banks with over $100 billion of assets – are designed to support the identification and management of climate-related financial risks at supervised institutions. The principles are intended to provide large banks with a high-level framework for the safe and sound management of exposures to climate-related financial risks consistent with existing OCC rules and guidance. In reviewing the draft principles, Covington noted several key takeaways:
- The proposal would require that covered banks develop climate-related risk limits and key performance indicators.
- Despite the proposal’s emphasis that each covered bank should develop climate risk management practices commensurate to its size, complexity, and other factors, the application of certain elements identified in the proposal – mandatory scenario analysis in particular – would be a significant development.
- The proposal generally would prescribe a range of specific elements of banks’ risk management frameworks for climate-related financial risk, including with respect to governance, risk management, and scenario analysis, but appears to leave banks with considerable flexibility in how these elements are implemented.
- The proposal incorporates climate risk into existing risk types, rather than treat climate risk as an independent risk type – which aligns with the treatment of risk management in the FSOC Report.
The OCC’s release is instructive in understanding the OCC’s frame of mind on climate risk, but the principles are not set in stone. The OCC has requested feedback on the draft principles by February 14th. The OCC has said it will use this feedback to inform any future guidance with respect to climate-related financial risk and detailed guidance for each risk area is expected this year.
Interestingly, the OCC did not publish the draft principles jointly with the other banking regulators. The banking agencies have been jointly discussing climate risk and some now question whether the OCC going it alone here is indicative of the agencies taking different approaches to climate risk. However, that conclusion may be premature. As Politico reported “the Federal Reserve said it would also be reviewing comments on the OCC document ‘as we continue to move toward the development of an interagency set of supervisory expectations for the management of climate-related financial risks with a focus on large banks.’”