Lael Brainard, governor of the Federal Reserve, offered the clearest signal that the US central bank will begin to seriously assess the exposure of large banks to climate-related financial risks.
Mrs. Brainard said the Fed is developing climate-related scenarios for use in bank security reviews, which are often called stress tests. He also supported the use of supervisory guidelines (Fed recommendations to banks) to encourage financial institutions to curb their exposures.
“I anticipate that it will be useful to provide supervisory guidance for large banking institutions in their efforts to properly measure, control and manage climate-related material risks, following the leadership of other countries,” Ms. Brainard, talking about comments prepared for a Fed research conference.
Mrs. Brainard said the Fed is also assessing climate-related risks from a broader perspective, trying to figure out what the melting of ice caps and rampant forest fires could mean for the financial system in general.
“We are developing scenario analysis to model the potential financial risks associated with climate change and assess the resilience of individual financial institutions and the financial system to these risks,” he said.
The fact that it is developing climate scenarios makes the Fed more in line with its global counterparts, including the European Central Bank and the Bank of England, which have been examining what climate risks could mean for the banking sector. It also comes at a time when the Fed – and its leader Jerome H. Powell – have faced the opposite reaction to move slowly towards a more concerted climate boost.
Powell had also suggested that the Fed would test banks’ exposure to climate problems, although their statements to lawmakers during last week’s testimony were not as definitive or as detailed as Ms. Brainard. He explained that the Fed’s goal was to make sure regulated banks could manage any of the risks posed by threats such as climate change.
“Scenario analysis will almost certainly be one of the main tools for doing just that,” Powell said.
The central bank oversees the country’s largest banks, including institutions such as Goldman Sachs and Bank of America.
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