kevin stiroh : a microprudential perspective on the financial risks of climate change remarks by mr kevin stiroh, executive vice president of the financial institution supervision group of the federal reserve bank of new york, at the 2020 climate risk symposium, global association of risk professionals ( delivered via videoconference ), 10 november 2020. * * * introduction good morning and thank you for the opportunity to participate in garp ’ s2020 climate risk symposium. as shown by the strong turnout today, attention on climate - related financial risks is clearly growing within finance, both for the private sector and the public sector. today, i ’ ll speak about these risks from a microprudential perspective — that is, the impact on specific financial institutions, particularly banks, and how firms are managing those risks. i ’ ll also provide a short update on some of the work under way through the basel committee ’ s task force on climate - related financial risks — the tfcr. before proceeding, i ’ ll emphasize that i am speaking only for myself and not necessarily the federal reserve system or the federal reserve bank of new york. risk management perspective from a supervisory perspective, a primary focus is to ensure that banks operate in a safe and sound manner and manage risks so they are resilient to a range of shocks. as you know, the core of effective risk management includes identifying, measuring, and managing traditional banking risks like credit risk, market risk, operational risk, or liquidity risks. these risks can materialize from a range of shocks — a recession, a geopolitical event, or a bad actor. and climate change. the purpose of bank supervision is to ensure that supervised firms are resilient to all of these risks. 1 banks are becoming increasingly attuned to the heightened financial risks from a changing climate. these risks can manifest in a number of ways : the impairment of collateral due to severe weather events ; mark - to - market losses from the devaluation of companies with stranded assets ; stress to contractual cash flows as regional shocks are realized ; or the reduced provision of financial services as business strategies adapt. all of these are salient concerns for financial firms and their supervisors. financial firms are now incorporating these risks into existing risks management frameworks. many firms view climate change as a cross - cutting risk driver that spans familiar risk categories, broadly affecting risk management approaches. moreover, some firms are considering governance issues, the use of scenarios analysis, disclosure options, and thinking about the

s problem. sometimes i worry, however, that this phrase — “ own the risk ” — has become overused and can itself give rise to risk. to be clear, clarity of roles and responsibilities with respect to risk management is critical. business managers should not be able to outsource accountability for risk management to others. still, i wonder if it is time to retire the phrase “ own the risk ” or at least be more thoughtful about its use. if a business manager is told that she “ owns the risk, ” she may feel empowered to ignore or otherwise shut out other key stakeholders and control functions. after all, if she truly owns the risk, then why does she have to listen to anyone else? this is obviously wrong. lawyers and compliance professionals, for example, should be part of an ongoing conversation about risk management. or, conversely, if those lawyers and compliance professionals do not themselves share some stake in the risk, they may not feel that speaking up or challenging a position by the business line is worth it. after all, the business line “ owns the risk ” and they ( the lawyers or compliance officers ) do not. what ’ s more, certain types of risks, in certain types of contexts, do not fit neatly into the “ own the risk ” model. reputational risk is an example. firms often discover, to their dismay, that reputational risk cannot be neatly contained within one business line, or even within one organization. in a sense, it would be better to think of certain types of risks as shared, with shared accountability, rather than owned. in short, it is important to remember that risk management is a means to an end. who “ owns the risk ” is not as important as clearly understanding how that risk may inhibit an organization from fulfilling its purpose or achieving its goals, and clearly understanding how that risk is being managed. that does not mean that responsibility should be unattributed or entirely diffuse. rather, responsibility for risk should not be parsed so finely that employees forget the purpose of managing risk in the first place. understanding the client i promised at the outset that i would talk about the role of lawyers in risk management. first and foremost, lawyers must advise on the law. a colleague of mine likes to say that lawyers must always remember the reason why they are in the room — to advise on the law. to do so, of course, lawyers must know what the law says. 4 / 7 bis central bankers'speeches