Brainard Backs Climate Guidance for Banks, Going Beyond Quarles

(Bloomberg) -- Federal Reserve Governor Lael Brainard favors banks conducting analysis of how they could be at risk to climate change, while acknowledging it will be a complex task.

“It will be helpful to move ahead with the first generation of climate scenario analysis to identify risks and potential issues and to inform subsequent refinements to our models and data,” she said in a virtual speech Thursday to a Boston Fed conference on stress tests.

Her remarks go beyond the stance taken by Fed Vice Chair for Supervision Randal Quarles, whose tenure in that role ends on Oct. 13. Brainard is viewed as a potential candidate to replace Quarles. She has also been backed to be the next Fed chief by some Democrats who don’t think Chair Jerome Powell has gone far enough on combating climate change.

Brainard also said it would be useful “to provide supervisory guidance for large banking institutions in their efforts to appropriately measure, monitor, and manage material climate-related risks.”

Powell earlier this year said the central bank will probably end up requiring banks to conduct tests to judge their vulnerability to the effects of climate change.

The Fed under Powell has increasingly turned its focus to financial risks presented by climate change in recent years, attracting criticism from Republican lawmakers. It joined the Network for Greening the Financial System in December, a global coalition of central banks engaged in the study of climate risk that was launched in 2017.

In highlighting the complexity of the task, Brainard said climate analysis could also include how financial institutions insure or hedge themselves against risk.

“With climate risk raising insurance premiums charged to property owners or reducing the availability of insurance in certain geographies and on certain asset classes, it may be important to assess the resilience of insurance and other hedging strategies,” she said. “Stress could be transmitted through a sudden repricing of insurance contracts or by a withdrawal of coverage.”

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