US bank regulator sees need for ‘open mind’

NEW YORK (Reuters): US regulators should assess a range of climate scenarios when gauging banks’ exposure to climate change risks rather than pursuing standardized stress tests, a top US bank regulator said on Wednesday.

Michael Hsu, the acting Comptroller of the Currency, said there is an urgent need for action to measure financial risks stemming from climate change, but both the industry and its watchdogs need to approach the emerging issue with “a clean sheet of paper and an open mind.”

In particular, Hsu said ongoing efforts to build tools to measure hypothetical losses from future climate change scenarios need to prioritize a diversity of approaches rather than a standardized, comparable approach similar to what banks already undergo in annual “stress tests” of their finances.

Given the uncertain nature of climate-related financial risks, he said there is more value in coming up with a wide range of ways to probe weaknesses. His remarks also indicate regulators are not currently considering a regime for climate risk that is similar to stress tests, whose results set capital requirements for specific firms.

“With climate-related risks, I believe we are much more exposed to failures of imagination — not asking enough ‘what if?’ questions — than we are to failures of stringency or consistency,” he said, according to prepared remarks. “I am concerned that the muscle memory of capital stress testing is more likely to handicap climate scenario analysis than to help it.”