Fed’s Brainard Says Banks Will Likely Need Guidance From Regulators On Managing Climate Risk

“Ultimately, I anticipate that it will be useful to provide supervisory advice to large banking institutions in their efforts to appropriately measure, monitor and manage significant climate-related risks,” she said in virtual remarks at a conference Thursday on banking supervision organized by the federal government. Reserve Bank of Boston.

Ms Brainard’s remarks are notable in part because she is seen as a potential candidate to become the Fed’s vice president of banking supervision, succeeding Randal Quarles, whose term expires next week. Ms Brainard is also a potential candidate to succeed Fed Chairman Jerome Powell, whose term expires early next year.

“Climate change could have profound consequences for the level, trend growth and variability of economic activity over time,” Ms. Brainard said. The coronavirus pandemic “is a stark reminder that extreme events can materialize with little warning and trigger serious losses and market disruption,” she said.

Ms Brainard said the Fed is currently exploring ways to incorporate so-called scenario analysis to account for both the physical risks of climate change and the costs associated with any transition to a low-carbon economy. Natural disasters and government policy actions to tackle climate change “could quickly alter perceptions of future risks or reveal new information about the value of assets,” she said.

Ms. Brainard identified the need for scenario analyzes that model projected income and loss for banks in order to differentiate risks geographically and within different sectors of the economy. These assessments should also take into account an intensification of climate-related risks, at regional or sectoral level, over time.

Unlike central banks in the rest of the world, the Fed faces a delicate balancing act in navigating its role on the issue, as the US political establishment has failed to reach any consensus on how or whether to fight against climate change.

Some progressive Democrats have criticized Mr Powell, a Republican, for failing to use the Fed’s supervisory powers over banks to more explicitly influence the terms under which certain industries, such as fossil fuel exploration and development, can access credit. They want President Biden to replace Mr Powell when his term expires early next year with someone more focused on climate change, potentially including Ms Brainard, a Democrat.

Ms Brainard expressed some impatience with the state of climate-related financial policy at an economics conference in Arlington, Va., Last week.

“This is an area where the United States has fallen behind, and we need to catch up,” Ms. Brainard said.

Republicans have warned the central bank against overstepping its authority. House GOP lawmakers, for example, have opposed a proposal by the Securities and Exchange Commission to develop weather risk disclosure standards for publicly traded companies.

Mr Powell, who was a director of The Nature Conservancy, a public charity focused on conservation, before joining the Fed’s board of directors 10 years ago, warned earlier this year that climate change poses profound challenges for the economy and global markets. He acknowledged that the Fed should play a role in monitoring and managing potential risks, but he also said that implementing a comprehensive national climate policy was “not a matter for the Federal Reserve.”

The Fed joined a global group of financial regulators and central banks last year that focused on sharing best practices for managing climate-related risks. Ms Brainard pointed to the uncertainty and limits of what the central bank might initially find. “We should be humble about what the first generation of climate scenario analysis is likely to deliver,” she said in her remarks Thursday.

The Fed has created two different internal committees to monitor the potential threats posed by climate-related shocks to the economy. One is focused on improving how banking regulators deal with risks to the nation’s largest financial institutions as part of the Fed’s role of overseeing these companies, and the second is dedicated to reviewing the risks to the nation’s largest financial institutions. threats to the financial system as a whole.

Write to Nick Timiraos and [email protected]