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Fed's Analyze Climate Risks And Impact To Financial System

Climate Risks
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EDITOR NOTE: The idea is that climate change can make banks, insurers, and reinsurers less “diversified” especially since the risks--seemingly uncorrelated with their operations--can have a severe effect on their capacity to function. We’re talking about tail risks. And given the evidence that climate change may be taking place (even though scientists are still debating the matter), it's a risk that financial companies should start considering. But should it be part of the Federal Reserve’s mandate? Will the Fed’s bureaucracy benefit or add damaging complexity to the matter? And given the Fed’s history of engineering booms and busts, and destroying the integrity of a more natural economy, should the Fed be trusted to use its monetary powers to now intervene in “ecological” matters? With its monopoly on money in the US, is the Fed now trying to overreach toward climate-related policies that may dictate the way you interface with the natural environment?

The Federal Reserve has taken another step forward in efforts to ensure that the financial system is protected against climate risks.

As the central bank turns its attention increasingly toward the matter, the Fed has created a Financial Stability Climate Committee and a Supervision Climate Committee.

The panels will focus on “the potential for complex interactions across the financial system,” Fed Governor Lael Brainard said in remarks Tuesday.

“Climate change and the transition to a sustainable economy also pose risks to the stability of the broader financial system. So a second core pillar of our framework seeks to address the macrofinancial risks of climate change,” Brainard added.

The Supervision Climate Committee will focus on identifying risks and putting together a program to address them. The Financial Stability Climate Committee will address “macroprudential risks” for how climate could pose systemic risks to the institutions the Fed supervises.

While taking on the climate issue represents a broadening of the Fed’s role in supervising banks and other financial institutions, officials have stressed the potentially damaging impact weather-related events can have on the system.

The central bank had begun asking large institutions to assess the potential impact of climate and how they are prepared to weather significant events. Brainard was the first Fed official to start talking about the issue, saying in late 2019 that she wanted her colleagues to begin considering how climate events could impact monetary policy.

“Financial market participants that do not put in place frameworks to assess and address climate-related risks could face significant losses on climate-sensitive assets caused by environmental shifts, by a disorderly transition, or both,” Brainard said.

She added that “robust risk management” across a number of areas “can help ensure the financial system is resilient to climate-related risks and well-positioned to support the transition to a sustainable economy.”

However, the movement to address climate change has received some pushback from congressional Republicans, who worry that the Fed is exceeding its existing mandate.

At a hearing Tuesday before the House Financial Services Committee, Fed Chairman Jerome Powell faced questions about whether the central bank ought to be involved in the matter.

For his part, Powell has indicated that climate change is not central to the Fed’s mission but is nonetheless important.

“It’s really very early days of trying to understand what this all means. It clearly can have longer-term implications for our economy, our financial system and the people who we all serve,” Powell said. “It’s early days, but we feel like we have the responsibility to start the process of understanding” the risk.

Powell said the look into climate change’s impact is part of making sure institutions are “resilient” in the face of risks.

Originally posted on CNBC

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