US Banks Lag in Climate Risk Management, Regulator Finds

In a recent report, Reuters revealed that major US banks are still in the early stages of grappling with climate change risks, raising concerns about the sector's readiness to handle the financial impact of a warming planet. The findings, based on a confidential review conducted by the Office of the Comptroller of the Currency (OCC), were disclosed by three individuals familiar with the matter.

The OCC's review, which encompassed 22 large banks, underscores a significant lag in the sector's climate risk preparedness. A letter sent to bank CEOs—previously unreported—details the varying levels of progress across the industry, with many banks still struggling to integrate climate risk into essential functions such as strategic and operational planning, internal audit processes, and risk appetite assessments.

According to the Reuters sources, who spoke on condition of anonymity, the review highlighted several key issues:

• Risk Identification in Early Stages: While all banks have completed some form of climate risk identification, most are only beginning to weave these considerations into their broader business strategies.
• Scenario Analysis Lacking: Crucially, several banks have yet to implement climate scenario analysis—a vital tool for projecting future risks, which could have dire consequences for their long-term stability.
• Governance Frameworks Underdeveloped: The report also pointed out that significant work remains to be done in establishing robust governance frameworks for managing climate risks effectively.

These findings paint a stark picture of the sector's readiness to confront climate challenges, which some experts warn could threaten trillions of dollars in assets if left unaddressed.

The OCC's review is part of a larger initiative by US financial regulators to tackle the growing threat of climate-related risks. Last year, the OCC, alongside the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, issued guidance on managing these risks. The Federal Reserve also conducted a parallel exercise with the nation's six largest banks, simulating the potential financial impacts of extreme weather events and the transition to cleaner energy.

Although the OCC's letter stops short of mandating specific actions, it signals that climate risk management will remain a focal point of ongoing regulatory scrutiny. The sustained attention from regulators suggests that banks will need to accelerate their efforts to avoid potential repercussions.

However, the banking industry's response to these risks has been mixed. Some executives are reportedly skeptical about the immediacy of climate change as a threat, comparing it to the more immediate risks posed by economic downturns.

As the global financial community continues to grapple with the economic implications of climate change and shifting energy policies, the OCC's findings—brought to light by Reuters—highlight an urgent need for US banks to enhance their climate risk management strategies. The clock is ticking, and the stakes are only getting higher.

When approached for comment, an OCC spokesperson declined to provide details on supervisory activities.

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