Fed’s Brainard Says Banks Must Protect Against Climate Risks

Climate change poses risks to the U.S. economy and regulators should assess the impact that it may have on financial stability, said Federal Reserve Governor Lael Brainard, wading into a politically charged topic.

“Climate change is one of the major challenges of our time,” Brainard told a virtual event hosted by the Center for American Progress. “We are already seeing elevated financial losses associated with an increased frequency and intensity of extreme weather events.”

Climate change is a politically tricky topic for the U.S. central bank, which only announced its membership in the Network for Greening the Financial System on Dec. 15, a day after the Electoral College confirmed President-elect Joe Biden’s victory. The body requires members to be signatories of the Paris Accord on climate change, which President Donald Trump left but Biden has committed to rejoin.

Severe weather events, such as hurricanes and wildfires, are increasing due to climate change and are impacting U.S. businesses, investment, home insurance practices and mortgage rates, Brainard said. Her speech came as the central bank ramps up its research into climate change and how it may impact the economy and financial system.

“We are improving our understanding of climate risks and their impact on financial stability through staff research and engagement with other central banks on topics like climate scenario analysis,” Brainard said. “Supervisors are responsible for ensuring that supervised institutions are resilient to all material risks, including those associated with climate change.”

However, she also acknowledged that it’s hard to gauge bank exposure to climate risk because of data gaps and problems with methodology. “Although the transmission channels through which climate risks affect banks are increasingly apparent, quantification of those risks remains challenging,” she said. “Climate change also poses distinct modeling challenges.”

Republican Backlash

The central bank’s increased work on climate issues has raised concern among some Republicans in Congress. Several House members wrote to the Fed on Dec. 9 asking it to proceed with caution in adding climate-related benchmarks to its stress tests of the financial system.

The Republicans cited a lack of historical data linking climate change to to financial stress. They also argued that adding climate change criteria to the stress tests could make it harder for the coal, oil and gas industries to gain access to credit.

Fed Chair Jerome Powell, speaking at a press conference Wednesday, said climate change is relevant to the Fed’s mandates and that it’ll move forward in researching the impacts on the financial system “with great transparency.”

Brainard indicated Friday that the Fed’s assessment on climate change impacts on the financial system would be different from its usual bank stress tests.

“In part because of the different nature of climate-related risks relative to financial and economic downturns and the significantly longer planning horizon, this is distinct from established regulatory stress tests at banks, which are used to assess capital adequacy over a relatively short horizon,” Brainard said.

©2020 Bloomberg L.P.

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