Exclusive-US regulator probes banks' climate risk planning

By Isla Binnie and Chris Prentice

(Reuters) - The U.S. Treasury Department's Office of the Comptroller of the Currency (OCC) carried out its first climate risk assessment of more than two dozen banks in recent months, laying the groundwork for heightened scrutiny of Wall Street's accounting for such threats, people familiar with the matter said.

Dubbed a "discovery review," the previously unreported process involved the regulator assessing how banks are accounting for the impact of climate change on their loan books and business, as well as exploring how they manage energy finance and greenhouse gas emissions, according to the sources.

The exams shed light on how the OCC plans to implement guidance on climate risk for banks with more than $100 billion in assets, which it issued in October together with the Federal Reserve and the Federal Deposit Insurance Corporation. More than 30 banks meet this threshold, according to the latest OCC data available on its website.

Identifying and acting on this risk has been one of U.S. President Joe Biden's key administration priorities.

The regulator used the discovery review to establish a baseline of banks' practices so it has a yardstick with which to assess their progress in implementing the guidance, the sources said. The OCC may take disciplinary action as early as next year against banks that do not show progress, the sources added, requesting anonymity to discuss confidential regulatory matters. 

An OCC spokesperson acknowledged carrying out the discovery review but declined to comment on the details.

"The OCC's focus on and supervision of climate-related financial risk is firmly rooted in its mandate to ensure that national banks and federal savings associations operate in a safe and sound manner. The OCC's approach is focused on banks' risk management, not on setting industrial policy," the spokesperson said.

The information-gathering visits, which happened mostly in the second half of 2023, involved multiple meetings with the banks over several days, three of the sources said.

Specialists in risk management, operations, monitoring and audit were called to the meetings, according to the sources. Chief risk officers attended some of the meetings, two of the sources said.

Bankers handling relationships with clients, compliance and risk officers and auditors were asked about climate risk to see if they responded coherently, one of the sources added.

OCC officials also sent lengthy requests for information on dozens of points to banks, ranging from how they would prepare for a shift to low-carbon energy to how they use data and monitor progress towards targets, the sources said.

Examiners also wanted to know how banks' public comments on climate align with their investment plans and risk appetite, two of the sources said.

OCC staff were at times joined by officials from the Federal Reserve Board, one source said, and in other cases by representatives of the Prudential Regulation Authority (PRA) of the Bank of England, another of the sources added. It is not unusual for the OCC to share information with the Bank of England and other foreign regulators through memorandums of understanding to better supervise global banks.

A PRA spokesperson declined to comment.

'PRUDENCE DEMANDS IT'

Michael Hsu, who became acting OCC Comptroller in 2021, was among the first banking regulators to push for the sector to assess and manage its risk to climate change.

Hsu told U.S. lawmakers in October that the OCC has worked with large banks to better understand and help them mitigate climate-related financial risks, and that it plans to monitor these frameworks in the future.

"They should not wait for disaster to strike before they act. Prudence demands that regulators and the industry adapt as risks emerge," he said.

The OCC appointed its first-ever Chief Climate Risk Officer in July 2021. Former banker Nina Chen, who had also worked at major non-profit The Nature Conservancy, has been serving in that role since September 2022.

Federal Reserve Chair Jerome Powell has said his agency "is not and will not be a climate policymaker." The U.S. central bank has taken the lead on a separate, more narrowly targeted exercise which required the six biggest U.S. banks to map out what extreme weather and the transition to cleaner forms of energy will do to their assets and investments.

That review included Bank of America, Citigroup, Goldman Sachs Group, JPMorgan Chase, Morgan Stanley and Wells Fargo. This process has now wrapped up, with the Federal Reserve expected to publish aggregated findings shortly, a source familiar with the matter said.

Spokespeople for the Fed and all the banks declined to comment.

(Reporting by Isla Binnie and Chris Prentice in New York; Additional reporting by Saeed Azhar in New York and Pete Schroeder in Washington; Editing by Greg Roumeliotis and Nick Zieminski)