The largest U.S. banks should guard against climate-related risks, a top banking regulator said in a proposed set of guidelines released Thursday.
“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safety and soundness, as well as the overall financial system,” the Office of the Comptroller of the Currency said in a draft guidance statement.
The guidance is aimed at U.S. banks with more than $100 billion in total consolidated assets, but also will likely influence many small and regional banks in the U.S. as they weigh looming hazards linked to a changing climate.
Michael Hsu, the acting comptroller of the currency, has urged the financial services industry to take risks posed by climate change more seriously.
“Today’s release takes an important, concrete step towards ensuring the safety and soundness of large banks in the face of increasing risks from climate change,” Mr. Hsu said.
The draft guidance includes principles on how large banks ought to address climate-related financial risk in their governance, policies and strategies. Those principles will shape OCC expectations for regulated banks.
Climate risks fall in two large categories: physical, or the risks of harm flowing from weather events; and transition, or risks associated with government and consumer moves to address climate change. Banks are likely to face both types of risk, the OCC said.
Though the guidance shows the regulator’s interest in prodding banks to consider their climate exposure, the largest U.S. banks already devote significant resources to that area. But smaller banks could take important climate risk cues from the OCC.
“The smaller the bank, the fewer the resources they have. As you go down in size, banks tend to follow the lead of their regulators,” said Nancy Foster, the head of the Risk Management Association, which has more than 1,700 financial institutions among its members.
“Until regulators really raise it up and start talking about it, it could be on the back burner for a smaller bank,” Ms. Foster said.
The OCC is seeking public comment on its guidelines, including on whether the guidelines should apply to institutions beyond the largest banks, until Feb. 14. The regulator said it intends to expand on the principles in future guidance.
Write to Richard Vanderford at richard.vanderford@wsj.com
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