U.S. banking regulator sees need for “open mind” in climate risk calculation

By: News Team

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U.S. policymakers should assess a variety of climate scenarios by measuring banks’ exposure to global warming risks, rather than applying standardized stress tests, a major financial sector regulator said on Wednesday.

Michael Hsu, the Acting Comptroller of the Currency, said there is an urgent need to take steps to calculate the financial risks arising from climate change, but both the industry and its watchdogs must address the emerging problem with “a blank sheet of paper and with an open-minded perspective.”

In particular, Hsu said ongoing efforts to generate tools that measure hypothetical losses from future climate change scenarios should prioritize a diversity of comparable approaches rather than a standardized view, similar to those already experienced by banks with the “stress tests” on their finances that are conducted each year.

Given the uncertain nature of climate-related financial risks, Hsu said it’s more valuable to devise a wide range of ways to investigate weaknesses.

Their comments also indicate that regulators are not currently considering a regime for climate risk that is similar to stress tests, the results of which set capital requirements for specific companies.

“Given the risks related to the climate, I think we are much more exposed to failures of foreseen scenarios, without asking enough questions like ‘What if?’ about what we have and that could detect errors of rigor or consistency,” he said, according to prepared statements.

“I am concerned that the core memory of the capital stress tests may further deteriorate the analysis of climate scenarios rather than reinforce it,” he added.

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