ABA Calls for Principles-Based Approach to Large Bank Climate-Related Financial Risk Guidance

The American Bankers Association today called on the OCC to continue taking a “principles-based approach that is flexible and iterative” to climate-related financial risk management for large financial institutions. ABA also urged the agency not to extend its guidance to midsize and community banks “until more robust data is available, and the climate-related financial risks and opportunities are better understood.” The OCC in December issued draft principles outlining a framework for climate risk management for banks with more than $100 billion in total consolidated assets.

In a comment letter, ABA cautioned that climate risk-related assessments and practices are still in nascent stages, and that “attaching regulatory consequences to climate-related risk exposures would be premature.” ABA added that banks are already have comprehensive, well-understood frameworks for measuring traditional bank risks, and that large institutions in particular have already begun incorporating climate information in their risk assessments.

ABA also recommended that the OCC further clarify its expectations regarding climate scenario analysis. Specifically, ABA said that the term should “connote an exploratory exercise for banks’ assessment of the impact of climate-related risks and opportunities over short, medium, and long-time horizons,” and should be an internal and confidential supervisory process. The association also urged the OCC to continue to tailor any climate-related guidance and work with other banking agencies and financial services regulators as climate risk management evolves.

In a separate comment letter, ABA also offered feedback on a recent consultation document from the Basel Committee on Banking Supervision regarding climate-related financial risk. While reiterating its support for a principles based approach, ABA warned that “certain principles and supporting text in the consultation are overly prescriptive and assume a level of analytical sophistication that is challenging.”

“Climate-related financial assessment tools and approaches are evolving and there is significant uncertainty about the policies governments will take to mitigate climate change, which institutions they will affect, and under what timeframe,” ABA wrote. “There is also an absence of robust market data, standardized definitions surrounding what is meant by climate-related financial risk, or consensus on how climate-related risk can be incorporated into the management of traditional financial risks. Together, these foundational gaps mean that the processes, procedures, and methodologies surrounding climate-related risk identification and monitoring are in the earliest stages of development.”