Given BPI member banks’ experience in this space, we believe six overarching principles should guide the OCC in finalizing its climate-related financial risk guidance. These principles and associated recommendations are summarized below:
The principles-based nature of the Proposal appropriately reflects the diversity of climate- related financial risks to which banks may be exposed and the need for flexibility in the design and implementation of risk management approaches in this area.
- The Proposal should reflect that that there is significant variability of potential climate- related financial risk outcomes over longer time horizons.
- The Proposal’s Policies, Procedures, and Limits section should retain its flexible approach and acknowledge it would be premature at this time to require banks to establish and apply quantitative limits or thresholds for climate-related financial risk.
- The Proposal’s Governance and Data, Risk Measurement, and Reporting sections should permit appropriate flexibility in the design of reporting.
The final guidance should clearly acknowledge that banks’ approach to managing climate- related financial risk should be fundamentally risk-based, such that individual banks may tailor their risk management programs to the risks presented and calibrate that program to the risks identified.
- The Proposal’s Risk Management section should clarify that for purposes of risk management, individual banks will need to define “materiality” in the context of their individual circumstances and risk appetite framework.
- The Proposal’s Data, Risk Measurement, and Reporting section should acknowledge that an appropriate, risk-based approach may lead individual institutions to focus on different aspects of their portfolios.
- The Proposal’s Scenario Analysis section should acknowledge that banks have the flexibility to conduct scenario analyses at appropriate, risk-based intervals.
The final guidance and its underlying expectations should reflect the fact that data and tools to measure and quantify climate-related financial risk remain nascent and not fully developed.
- The Proposal should acknowledge that, in the near-term, climate-related financial risk metrics and reporting may be more qualitative in nature.
- The Proposal’s Strategic Planning, Risk Management, and Other Nonfinancial Risk sections should reflect the nascent state of relevant data.
- The Proposal’s Scenario Analysis section should reflect the relative immaturity of underlying data and methodologies.
The final guidance should acknowledge that it may be appropriate and beneficial for banks to support customers through their respective low-carbon transition plans.
- The final guidance should not suggest that banks mitigate credit risk by establishing and managing to prescriptive lending limits.
We support the OCC’s recognition of the distinction between climate scenario analysis and regulatory stress testing.
We urge the OCC to coordinate with domestic regulators and international bodies to ensure consistent supervisory expectations with respect to climate-related financial risk management.
To read the full comment letter, please click here.