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Washington Watch: OCC takes step toward pressure on large banks to reveal climate-change risks

Banks should be transparent about the increasing risk from climate change to the properties they finance and their exposure to fossil fuel investments, a federal regulatory agency said Thursday.

The regulatory agency said it is tightening its expectations about disclosure through a set of draft principles for how large banks should be transparent to regulators and customers about both “physical” climate-change risk, such as from hurricanes and floods, and “transitional” risks, such as being overweight outmoded energy CL00, +1.65% or technology.

The framework, issued by the Office of the Comptroller of the Currency, falls short of new regulation, but is part of broader scrutiny among financial bodies as Washington and the rest of the world intensify their treatment of global warming and other factors.

Increased attention also stems in part as the U.S. is seen trailing other large nations and regions in shoring up financial systems against unchecked global warming and pushing for a more up-to-date calculation of climate risk.

These draft principles are targeted at the largest banks, those with over $100 billion in total consolidated assets.

More details on the framework can be found here, but the general thrust requires more diligence and transparency on climate change within planning, governance, risk management and the data that banks share. Feedback will be collected until Feb. 22.

The OCC already expects some comments to center on avoiding one-size-fits-all rules that may position some banks at a disadvantage and more clarity on which risk modeling might be used universally.

“Weaknesses in how banks identify, measure, monitor, and control the potential physical and transition risks associated with a changing climate could adversely affect a bank’s safety and soundness, as well as the overall financial system. Adverse effects could include potentially disproportionate impact on the financially vulnerable, including low- to moderate-income (LMI) and other disadvantaged households and communities,” the OCC said.

“Many banks are considering these risks and would benefit from additional guidance as they develop capabilities, deploy resources, and make necessary investments to address climate-related financial risks,” the agency added.

The Financial Stability Oversight Council (FSOC), an umbrella group of financial regulators including the OCC but under the direction of the Treasury Department, was created in the fallout of the financial crisis roughly a decade ago. It has since included a fresh look at climate-change risk to the financial system as part of its role.

Read: ‘Substantial amount of work yet to be done’: Major report calls on SEC, Fed, banks and insurers for robust climate-risk disclosure

“We look forward to reviewing comments on the principles released today by the Office of the Comptroller of the Currency, 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,” the Federal Reserve, which is also part of the FSOC, said in a statement.

“A consistent approach across bank regulatory agencies will best support the effective management of these risks,” the central bank said. “The Federal Reserve is committed to ensuring that supervised firms have strong risk management capabilities to promote their resilience to all risks, including climate-related financial risks.”

Some Fed officials, including Lael Brainard and Mary Daly, have dedicated policy speeches to climate-change risks. Chairman Jerome Powell has made clear in recent remarks that climate change should not be handled with the Fed’s short-term tools, such as monetary policy.

A report out this week with a title warning of “Wall Street’s Carbon Bubble” by the Sierra Club and the left-leaning Center for American Progress showed that eight of the largest U.S. banks and 10 of the largest U.S. asset managers combined to finance an estimated 2 billion tons of carbon dioxide emissions based on year-end disclosures from 2020.

That means if if Wall Street were a country, it would be the fifth-largest emitter of atmosphere-warming carbon emissions, nestling it right between Russia and Indonesia, based on the report’s findings.

The groups offered policy suggestions ranging from stress testing to boosting deposit insurance tied to climate risks to toughening supervisory ratings, which financial services trade groups have warned mix up short-term risks with longer-term risks.

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