Risks from climate change will affect US bank capital in the long run – official



Students attend a protest rally calling for urgent action to slow the pace of climate change, in Los Angeles, California, United States, March 15, 2019. REUTERS / Lucy Nicholson

WASHINGTON, June 2 (Reuters) – U.S. regulators will “eventually” need to incorporate climate change risks into banks’ capital rules, but it is still too early to say when this will become necessary, a senior official told Reuters responsible.

Acting Currency Comptroller Michael Hsu said in an interview that regulators are still exploring how best to incorporate climate change risks such as extreme weather events or major policy changes into oversight and monitoring. supervision of banks.

But regulatory capital requirements, the cash that lenders must set aside to absorb potential losses, would eventually become part of the risk management equation. Read more

“It would be difficult if not, because exposure is exposure and you have to manage risk and capitalize for that,” said Hsu, who took up his new role last month.

Comments from Hsu, a former senior Federal Reserve supervisor where he oversaw the nation’s largest banks, offer the clearest insight to date on the direction regulators are taking as they step up scrutiny of risks climate change finance under the administration of Democratic President Joe Biden. .

Climate change could disrupt the financial system, as physical threats such as sea level rise, along with carbon-neutral policies and technologies aimed at slowing global warming, could destroy billions of dollars in assets. , according to risk experts.

But as banking supervisors seek information on how lenders assess the impact of climate change on their loan portfolios, officials have generally been cautious that the new review could ultimately affect loan requirements. equity, which is a major concern for banks and their shareholders. Read more

However, Hsu said regulators still have a lot of research to do and other “steps” to take before they can start discussing the potential capital implications.

“There is a lot of work there before we get to the ultimate momentous question, which I think can arguably be just as impactful.”


With the US economy set to rebound as the COVID-19 pandemic subsides, Hsu warned of industry complacency which he said was underlined by the roughly $ 10 billion losses that big banks suffered during the collapse of Archegos Capital.

One of his main priorities, he said, is to ensure that banks do not relax their checks and balances on risk management, especially as they try to compete with their competitors. for the business of their clients.

“This is where senior bank executives, boards of directors and regulators just have to really listen and ask a lot of questions,” said Hsu, whose career also includes stints at the International Monetary Fund. and the Department of the Treasury.

Among the main risks facing lenders and borrowers is the impending expiration of mortgage holiday or “forbearance” programs that have kept millions of homeowners afloat amid pandemic lockdowns. These relief measures combined with other government aids have painted a grim picture for lenders, whose models struggle to assess the true financial health of borrowers, he said.

When forbearance programs come to an end, there is a potential “cliff edge” effect, Hsu said, as millions of borrowers who may still be struggling to make ends meet have to start repaying.

“It’s not as rosy as the numbers now suggest,” he added.

Reporting by Pete Schroeder; edited by Michelle Price & Shri Navaratnam

Our Standards: Thomson Reuters Trust Principles.


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