Regulators say climate stress tests not about capital

Federal efforts to gauge how well large banks are prepared to handle climate change risks will differ from traditional stress tests in that they are not about capital, representatives from the Office of the Comptroller of the Currency and Federal Housing Finance Agency said Tuesday during a webinar on climate regulation in the financial sector.

Under the Biden administration, financial industry regulators have pushed to measure climate risks facing the sector. The Federal Reserve announced in September that six of the largest banks would participate in pilot climate scenario analysis exercises starting in 2023. The American Bankers Association has repeatedly urged regulators not to tie any climate-related regulation or scenario analysis to capital standards. It has also stressed that any guidance or principles should remain high level to allow for significant changes and should not be applied to community or midsized banks.

Nina Chen, chief climate risk officer for the OCC, said her agency isn’t currently considering any such analysis, instead focusing on developing supervisory expectations for banks with more than $100 billion in assets. However, she noted that under OCC’s draft climate risk principles, such an exercise would be different from a traditional stress test. “It’s not about capital. It’s an exercise to understand capacity, to understand where potential exposures are, to understand the data gap or where your institution might need to develop their staff capability,” she said.

Dan Coates, deputy director at FHFA, said his agency is working on having the entities it regulates conduct some sort of scenario analysis and stress tests, but added there remains much work to be done in figuring out what those scenarios will be. “We’re working with [the Network of Central Banks and Supervisors for Greening the Financial System]and trying to learn about what they’re doing and how downscale those, or regionalize those, for areas of the U.S., and trying to make sure we have the data to run these scenarios and also stress tests.” He added that such tests would not be capital stress tests but “just to understand how vulnerable or not regulated entities are.”