Fed to form committee focused on climate risks to financial system


The Federal Reserve will create a committee to understand how climate change could upend the global financial system, a senior official announced Tuesday.

Fed Governor Lael Brainard said in a speech on Tuesday that the central bank’s new Financial Stability and Climate Committee (FSCC) will focus on the potential threats that climate change can pose to the financial world. at large.

While the Fed has already created a Climate Surveillance Committee (SCC) to study the climate risks facing specific businesses and the banking industry in general, Brainard said the new panel will focus on how related disruptions climate change could spill over into credit markets and other industries within the financial sector, triggering a wider crisis.

“Our macroprudential work program focuses on assessing not only potential climate shocks, but also whether climate change could make the financial system more vulnerable in ways that could amplify those shocks and cause adverse effects. ripple effects that could harm households, businesses and communities,” Brainard said in a speech at a conference hosted by the sustainability nonprofit, Ceres.

“These are not easy problems, and they won’t have easy solutions. Despite the challenges, making progress, even if initially imperfect, will be essential to ensure that the financial system is resilient to climate-related risks and well-positioned for the transition to a sustainable economy,” he said. she continued.

The new FSCC would work with the CSC and other federal government agencies, Brainard said, including the Financial Stability Oversight Council (FSOC), an interagency group of financial regulators. She also said the Fed would invest in new research and data tools to improve forecasting and modeling of climate-related financial risks.

“Quantifying the risks and implications of potentially catastrophic climate-related tipping points for the economy and the financial system is extremely difficult,” Brainard said.

“There is considerable uncertainty about the nature and timing of political, behavioral and technological changes that will occur during the transition to a sustainable economy,” she added. “This uncertainty could create significant challenges for financial stability.”

The new Fed committee will significantly broaden the scope of its efforts to monitor and prepare for climate-related financial risks. While Democrats praised the Fed for stepping up its climate oversight, Republicans criticized the bank and warned officials against any action that could hamper the oil and gas industry.

Brainard said Tuesday that the Fed was focused on “strengthening our ability to understand and address the risks, complexities and challenges of climate change,” and made no threats of future regulatory action Republicans fear. . Instead, Brainard said the Fed could use a scenario analysis process that “identifies climate-related physical and transition risk factors facing financial firms, formulates appropriate constraints of those risk factors in different scenarios and measures their effects on financial intermediaries and the financial system.”

The Fed is among several U.S. financial regulators that have expanded their climate-related oversight after a lack of serious attention to the issue under previous presidential administrations.

While the Fed has taken a measured approach to monitoring climate issues, the bank’s early actions have stirred intense backlash and skepticism among Republicans and oil and gas industry advocates.

Brainard delivered his speech as Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen – who has pledged to play a central role in the fight against climate change – came under fire from Republicans in the Chamber for their involvement in climate issues.

“I certainly understand that climate change, weather patterns could pose risks to individual creditors or insurance policyholders, but linking hypothetical climate scenarios to risk to the entire financial system seems to me highly speculative,” said Rep. Andy Barr (R-Ky.), who frequently opposes policies that could hamper coal production.

“I fear that injecting ill-defined climate scenarios into financial regulation and supervision creates the immediate and very real risk of driving investment and credit allocation away from job-producing industries like fossil fuels.”

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Don F. Davis