On July 18, Office of the Comptroller of the Currency (OCC) Senior Deputy Comptroller for Large Bank Supervision Greg Coleman testified on OCC supervision of climate-related financial risks before the U.S. House of Representatives’ Committee on Financial Services’ Subcommittee on Financial Institutions and Monetary Policy.
Coleman’s testimony reinforces the OCC’s focus on climate-related financial risks as it relates to the safe and sound operation of national banks and federal savings associations. In his testimony, Coleman emphasized that “the OCC does not and will not tell bankers what customers or legal businesses they may or may not bank.” Instead, the OCC’s focus is on climate-related financial risk management.
In December 2021, the OCC published draft “Principles for Climate-Related Financial Risk Management for Large Banks” (the principles), which are intended to provide a framework for banks with more than $100 billion in total consolidated assets to identify and manage climate-related financial risks. The principles describe general considerations for incorporating climate-related risks in a bank’s governance; policies, procedures and limits; strategic planning; risk management; data, risk measurement and reporting; and scenario analysis. The principles also discuss how climate-related financial risks can be addressed in traditional risk categories, such as credit, liquidity, operational, and legal/compliance risks.
In 2022, the OCC established an Office of Climate Risk to lead its efforts concerning climate-related financial risk, including in the areas of supervision, policy, and external engagement.
While the principles were clearly focused on banks with more than $100 billion in total consolidated assets, there has been an open question as to whether, and if so, how, the principles would inform supervision of and engagement with community banks. In remarks to the Institute of International Bankers in March 2022, Acting Comptroller Michael Hsu noted that it would be “a number of years before OCC examiners conduct climate risk management examinations” for community banks. He went on to suggest that community banks “[u]se the time wisely,” observing that “[t]o the extent that … community banks can develop thoughtful, tailored assessments of their climate risk profiles, they will help mitigate the risk of a ‘trickle down’ of large bank climate risk management expectations in the future.”
Coleman’s recent testimony clarifies that “[t]he OCC does not intend for [its] efforts aimed at the large banks to trickle down to community banks.” He discussed the familiarity of community banks with the impacts of weather events in their communities and their long-standing ability to manage related risks. He further stated that the OCC is committed “to continued dialogue and constructive engagement” with stakeholders, including community banks, in its efforts to develop and act on its climate-related financial risk management expertise.
However, Coleman’s testimony does not provide community banks with a pass on thinking about climate-related risks. Coleman reiterated Hsu’s suggestion from March 2022 that community banks consider climate-related risks and assess their climate-related financial risk profiles to enable them to manage these risks in a thoughtful and appropriate manner.
Additionally, community banks that have holding companies subject to SEC reporting requirements, or that are themselves subject to similar reporting requirements of the federal bank regulatory agencies will very likely be required to make new detailed climate-related disclosures in their SEC filings. As proposed, these disclosures would cover governance; climate-related risks and associated impacts; and the identification, assessment, and management of climate-related risks, among other disclosures. For a detailed discussion of the requirements of the SEC proposed rules, please see our alert memo titled, “SEC Proposes New Rules to Enhance and Standardize Climate-Related Disclosures.” The SEC’s Spring 2023 Regulatory Agenda anticipates these rules being finalized in October 2023.
Finally, many stakeholders, including investors, remain focused on climate-related issues, engaging now from both sides of the political spectrum. As climate-related issues continue to remain hot button topics, with the potential to have financial consequences if not properly managed, community banks must be prepared to engage with these issues and the stakeholders for whom these issues are important.