Three years after other major central banks began to focus on the risks to their financial systems from climate change, the Federal Reserve has started the process of catch-up.
“Addressing climate-related risks and opportunities… will not be easy,” Federal Reserve Governor Lael Brainard said Thursday.
“The long time horizon associated with climate change, the lack of historical data, the potential for sudden shifts in asset valuations, and the paucity of information on the climate-sensitivity of exposures complicate the translation of climate-related risks into measures of credit, market, liquidity, reputational, and operational risks,” Brainard said.
In her remarks Brainard suggested she favors “mandatory disclosures” to help investors assess and price climate risks. Brainard stressed she was not speaking for the entire Fed board of governors.
She said that “scenario analysis” might be a tool to assess risks to banks under a wide range of assumptions rather than including climate change in the Fed’s annual bank stress tests.
While some observers said that is good news for banks, former Fed Gov. Daniel Tarullo said the Fed’s stress-test process was not the appropriate vehicle to measure climate change.
“When people talk about stress testing on climate change, it has got to be something different from what we think of the Fed’s annual stress test… because the stress test is a scenario that plays out over the next nine quarters, and obviously that is unlikely to be the critical period for the impact of climate change,” Tarullo said as part of a recent Banking With Interest podcast .
Mostly Republican lawmakers have also pushed back on the Fed’s earlier indications it is mulling stepping up climate-related regulation of banks.
The Bank of England is close to launching a climate stress test and the Fed can learn from their experience, Tarullo said.
“The Fed is definitely playing catch up here,” said Gregg Gelzinis, associate director for economic policy at American Progress.
“I feel like the Fed is in the ‘evaluate, analyze and sharpen their understanding’ phase of this risk, and then, I think, the next natural step is obviously, to take action and actually integrate this focus into their regulation and supervision of financial institution,” he said.
Exactly what’s on the Fed’s plate?
“The problem that is trying to be solved is to mitigate the risks that climate change poses to the stability of the financial system and to the safety and soundness of individual financial institutions,” Gelzinis said.
Climate change could cause catastrophic losses in the financial system.