OCC wants US banks to prep for climate-related financial risks—which they should be doing anyway

The news: The Office of the Comptroller of the Currency (OCC) is working on preparedness principles for US banks to follow for managing climate-related financial risks.

The regulator put out a call for feedback for the principles—which would cover banks with at least $100 billion in assets—with a February 14, 2022 deadline.

More on this: The OCC warns that weaknesses in banks’ climate-risk management could pose threats to their safety and soundness.

In its draft principles document, the regulator identifies two broad risk categories:

• Physical disasters like hurricanes, flooding, and wildfires.
• Impacts of transitional steps to deal with climate change, including from businesses, consumers, and policymakers.

The OCC also outlines climate-related risks for specific categories that cover banks, such as:

• Credit, which covers both underwriting for borrowers and in portfolio management of debt outstanding.
• Operations, such as business continuity.
• Liquidity, which covers threats to banks’ liquidity buffers.
• Legal and compliance, which includes ensuring that risk management measures don’t disproportionately impact people based on race or ethnicity.

The big takeaway: Severe weather events are already doing major harm across the globe to homes and businesses, including tornadoes that went through six US states and flooding that swept through Germany, the Netherlands, and Belgium in July. Such events can impact customers of both digital and brick-and-mortar banking:

• Customers who live in directly affected areas may be unable to withdraw cash or make point-of-sale transactions with cards.
• Damage to data centers, unless offset with backup support, can affect digital-banking services for customers that live across the country.

Banks should have risk-management plans and business continuity plans in place for climate-change-related events like these—regardless of what actions the OCC, or any other regulators, decides to take. As an example, Deloitte outlines business-continuity actions that companies can take to deal with climate change threats:

• Tasking employees with sustainability to engage with people who focus on business continuity and risk management.
• Adding sustainability frameworks to business continuity management systems.
• Updating risk assessments so that climate risks are included.