Financial Institution Client Alert: Climate Risk

Certain U.S. banking regulators are planning to incorporate climate risk into bank stress testing exercises.  The head of the Office of the Comptroller of the Currency (OCC) recently indicated plans to release guidance on how banks should incorporate exposure to climate risk into their risk management frameworks.  Recognizing that climate change poses risk to the safety and soundness of the financial system, Michael Hsu (current acting head of the OCC), called for the need for banks to understand how their balance sheet exposure to physical and transition risk will feed into the banks’ credit risk, market risk, operational risk and liquidity risk frameworks.  In Hsu’s words: “what’s emerging now is that climate change is going to be impacting a number of those risks in different ways, and we need banks to prepare for that.”  Hsu indicated that the forthcoming guidance would be consistent with global regulatory principles as agreed to by international forums such as the Network for Greening the Financial System, which is a network of central banks including the Federal Reserve.   

Aon’s 2021 Global Risk Management Survey recently highlighted that the impact from climate change is generally underrated by many financial institutions.  Therefore, it is imperative for U.S. banks to understand the full universe of quantification, modeling and risk management tools available to help prepare for the climate transition and meet regulatory expectations.  See the attached article and podcast to understand the work that Aon is doing to adapt longstanding tools used by the (re)insurance industry for the banking sector to help our banking clients prepare for this evolving risk and regulatory landscape.