On March 7, 2022, Acting Comptroller of the Currency Michael J. Hsu spoke at the at the Institute of International Bankers Annual Washington Conference where he discussed climate-related financial risk and the importance of promoting diversity and inclusion in the banking industry. The IIB, according to Hsu, has a long history of bringing together senior government officials and industry leaders to address policy and business issues of importance to the international banking community in the United States.
Hsu began by briefly discussing the events in Ukraine to highlight two short-term imperatives and a longer-term challenge. The first imperative, according to Hsu, relates to sanctions where he encouraged the members of the Institute to work with their primary U.S. regulator and discuss specific questions on sanctions with OFAC. Secondly, Hsu talked about cyber defense and that heightened vigilance is warranted. The long-term challenge, said Hsu, is for the banking industry to be attentive to how trust in the international banking and financial system may change, and that trust must be safeguarded internationally.
In his speech, Hsu focused on two priorities for the OCC, namely climate risk, and diversity and inclusion.
From his statement regarding climate risk management:
“Consistent with the draft principles [Principles for Climate-Related Financial Risk Management for Large Banks] and our legal mandate, the OCC is laser-focused on the safety and soundness aspects of climate change risks. Unlike regulators in some other jurisdictions, we do not (yet) have a mandate to help meet carbon reduction targets. This means we cannot take supervisory measures specifically designed to accelerate the transition to a carbon neutral economy, such as limiting credit to fossil fuel companies. Rather, we are focused on large banks’ climate risk management capabilities: identifying, measuring, monitoring, and mitigating climate related exposures and risks. Weaknesses in risk management could adversely affect a bank’s safety and soundness, as well as the overall financial system.”
Talking about diversity and inclusion, Hsu stated two key questions to consider.
Are banks’ leadership ranks sufficiently diverse to handle the complexities and dynamic challenges of the day?
Hsu stated, “Without diverse leadership, banks and their regulators may develop blind spots or suffer from groupthink. These blind spots can lead to the kinds of nasty surprises that threaten safety and soundness—and possibly the financial sector as a whole. There is a growing body of empirical evidence that companies that address these blind spots by having diverse boards of directors have stronger earnings, more effective corporate governance, better reputations, and less litigation risk.”
Do banks and banking regulators fully reflect the communities we serve?
A study of 72 North American banks by Moody’s showed that women make up between 24 and 31 percent of those banks’ boards of directors. That data is consistent with the data on the large banks that OCC supervise. Hsu said that while women and minorities are no longer explicitly excluded from professional clubs and from recruiting and promoting within our fields, significant implicit barriers remain.
Hsu concluded his talk by emphasizing that safety and soundness demands prudent risk management of climate risks and improving diversity and inclusion can prevent blind spots and build trust in the banking industry.
Read the OCC Acting Comptroller’s full speech here.