Fed’s Brainard Highlights Risks Banks Face From Climate Change

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Federal Reserve Governor Lael Brainard said climate change and an economy-wide transition to green energy could prove disruptive for financial institutions if they don’t start preparing for those risks now.

Brainard, a member of the Fed board’s committee on supervision and regulation, said in a speech Thursday that financial institutions face physical risks from severe weather events caused by climate shifts, and transition risks as changes in policy, technology or consumer behavior lead to a lower-carbon economy.

Fed’s Brainard Highlights Risks Banks Face From Climate Change

“These physical and transition risks could materialize as traditional financial risks to supervised institutions, including through increased credit, market, operational, reputational, and liquidity risk,” Brainard said in the text of her remarks at a climate summit hosted by the Institute of International Finance in Washington.

U.S. bank supervisors put the largest lenders through annual stress tests to measure capital adequacy in response to hypothetical economic and financial shocks. Brainard said given the uncertainty around how climate risks might emerge, “scenario analysis may be a helpful tool to assess” climate risks.

The Fed board last month launched the Supervision Climate Committee to study such risks and co-chairs the Basel Committee on Banking Supervision’s Task Force on Climate-Related Financial Risks.

The Fed has visibly stepped up its engagement on the economic and financial challenges posed by climate change following the election victory of President Joe Biden, who has placed tackling the threat at the center of his agenda.

On Dec. 15, one day after Biden’s electoral college win was sealed, the Fed announced it had formally joined the Network for Greening the Financial System, an international network of central banks aimed at better understanding the risks posed by climate change.

NGFS rules requires its members be signed up to the Paris Climate Accord. President Donald Trump announced in 2017 that he was withdrawing the U.S. from the pact. Biden signed an order to re-enter the agreement hours after his inauguration last month.

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