Fed to investigate the risks posed by climate change to the financial system

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

As the central bank turns its attention to the issue, the Fed has formed a Financial Stability Climate Committee and an Audit Climate Committee.

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

“Climate change and the transition to a sustainable economy are also a threat to the stability of the wider financial system. So a second fundamental pillar of our framework is trying to address the macro-financial risks of climate change,” Brainard said.

The Audit Climate Committee will focus on identifying risks and developing a program to address them. The Financial Sustainability Climate Committee addresses “macroprudential risks” for how climate could pose systemic risks to the Fed-led institutions.

While the adoption of the climate issue represents an extension of the Fed’s role in overseeing banks and other financial institutions, officials have stressed the potential impact of events. related to the weather on the system.

The central bank had begun asking large institutions to assess the potential impact of climate and their willingness to deal with significant events. Brainard was the first Fed official to start talking about the issue, saying in late 2019 she wanted her colleagues to start discussing how climate events could affect monetary policy.

“Non-financial market participants that do not apply frameworks to assess and address climate-related risks could suffer significant losses to climate-sensitive assets caused by environmental shifts, with a disordered motion, or both, “Brainard said.

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

However, the move to tackle climate change has received some backlash from Republicans, who are concerned that the Fed is going beyond the existing command.

At a hearing Tuesday before the House Financial Services Committee, Fed Chairman Jerome Powell addressed questions about whether the central bank should be involved in the deal.

For his part, Powell has shown that climate change is not at the heart of the Fed ‘s mission but it is nonetheless important.

“These are very early days trying to understand what all this means. It is clear that it can have a long-term impact on our economy, our financial system and the people it serves. we all serve, “Powell said. “It is early days, but we feel obliged to begin the process of understanding” the danger.

Powell said the study into the impact of climate change is part of making sure institutions are “resilient” to risks.