As Winter Sweeps the South, Fed Officials Focus on Climate Change


A high Federal Reserve official issued a stark warning on Thursday morning: Banks and different lenders want to organize themselves for the realities of a world racked by local weather change, and regulators should play a key function in making certain that they do.

“Climate change is already imposing substantial economic costs and is projected to have a profound effect on the economy at home and abroad,” Lael Brainard, one among the central financial institution’s six Washington-based governors, mentioned at an Institute of International Finance occasion.

“Financial institutions that do not put in place frameworks to measure, monitor and manage climate-related risks could face outsized losses on climate-sensitive assets caused by environmental shifts, by a disorderly transition to a low-carbon economy or by a combination of both,” she continued.

The grim backdrop to her feedback is the abnormally chilly climate walloping Texas — leaving hundreds of thousands with out electrical energy and underlining the indisputable fact that state and native authorities in some locations are underprepared for extreme climate that’s anticipated to turn out to be extra frequent.

Such disruptions additionally matter for the monetary system. They pose dangers to insurers, can disrupt the fee system and make in any other case affordable monetary bets dicey. That is why it is crucial for the Fed to know and plan for them, central financial institution officers have more and more mentioned.

Ms. Brainard identified Thursday that monetary corporations had been addressing the threat by “responding to investors’ demands for climate-friendly portfolios,” amongst different adjustments. But she added that regulators like the Fed should additionally adapt. She raised the chance that financial institution overseers may want new supervisory instruments, given the challenges related to local weather oversight, which embrace very long time horizons and restricted knowledge as a consequence of the lack of precedent.

“Scenario analysis may be a helpful tool” to evaluate “implications of climate-related risks under a wide range of assumptions,” Ms. Brainard mentioned, although she was cautious to differentiate that such eventualities could be distinct from full-fledged stress exams.

Weighing in on local weather dangers publicly is new territory for the Fed. Officials spent years tiptoeing round the matter, which is politically charged in the United States. The central financial institution solely totally joined a global coalition dedicated to research on girding the financial system against climate risk late last year. The possibility of climate-tied stress tests has been especially contentious, and has recently drawn criticism from Republican lawmakers.

“We have seen banks make politically motivated and public relations-focused decisions to limit credit availability to these industries,” more than 40 House Republican lawmakers said in a December letter, specifically referring to coal, oil and gas. They added that “climate change stress tests could perpetuate this trend, allowing regulated banks to cite negative impacts on their supervisory tests as an excuse to defund or divest from these crucial industries.”

Jerome H. Powell, the Fed chair, and Randal K. Quarles, the vice chair for supervision — both named to their jobs by President Donald J. Trump — suggested in response that the Fed was in the early stages of researching its role in climate oversight.

“We would note that it has long been the policy of the Federal Reserve to not dictate to banks what lawful industries they can and cannot serve, as those business decisions should be made solely by each institution,” they wrote last month.

Mr. Powell and Mr. Quarles echoed the lawmakers’ assertion that the Fed’s bank stress tests measured bank capital needs over a much shorter time frame than climate change, though they said the Fed was working to help banks manage their risks, including those related to climate.

The central bank is quickly moving toward greater activism on the topic. Its Supervision Climate Committee, announced last month, will work “to develop an appropriate program” to supervise banks’s climate-related risks, Ms. Brainard said Thursday. The Fed is also co-chair of a task force on climate-related financial risks at the Basel Committee on Banking Supervision, a global regulatory group.

Though the central bank is politically independent, President Biden has placed climate at the center of his administration’s economic priorities. Treasury Secretary Janet L. Yellen has pledged to “fight the climate crisis.”

Ms. Brainard, the Fed’s last remaining governor appointed solely by President Barack Obama, has been a leading voice in pushing for greater attention to climate issues, speaking on the matter at a conference in 2019. So has Mary C. Daly, president of the Federal Reserve Bank of San Francisco, who held that conference. (Mr. Powell was initially appointed by Mr. Obama, but then elevated to chair under Mr. Trump.)



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