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The US Federal Reserve Board plans to include climate change
risk as part of its framework to assess the financial stability of
banks that it oversees, Fed Chairman Jerome Powell announced 31
March.
"One of our goals is to make climate change part of our regular
financial stability framework," Powell told the US Department of
the Treasury's Financial Stability Oversight Council (FSOC), which
Congress created in 2010 after the subprime mortgage crisis to
identify and monitor risks as well as respond to emerging threats
to financial stability.
Chaired by Secretary of Treasury Janet Yellen, the FSOC for the
first time made climate change risk a focus of emerging risks on 31
March.
The Fed will incorporate the risk that climate change poses
after it completes its study, which is still in the early stages of
analysis, he added.
Powell revealed the Fed's plans after US Secretary of the
Treasury Janet Yellen, who was chairing her first FSOC meeting,
announced the potential risk that climate change poses will be the
council's focus going forward.
His remarks are the strongest signal yet that the Fed is taking
steps to protect financial institutions and markets from the
incoming risks posed by climate-driven severe weather events,
which, for instance, have caused billions of dollars in property
damage that in turn have affected the portfolios of banks and other
institutions backing those assets.
In 2020 alone, the National Oceanic and Atmospheric
Administration reported the US suffered $95 billion in losses
from 22 weather- and climate-induced events.
While making it clear that setting climate policy is the purview
of elected officials, Powell acknowledged that climate risks have
material implications for the Fed's responsibilities to supervise
and regulate banks as well as maintain financial stability.
Early stages of analysis
He said the Fed is currently in the early stages of studying the
vulnerabilities that potential financial institutions face "both
from the consequences of climate change and the policies designed
to mitigate that effect."
Elizabeth Kiser, associate director of the Federal Reserve's
division of research and statistics, who is spearheading the study,
drew FSOC's attention to the risk climate change already could be
posing to residential and commercial properties that are backed by
mortgage-backed securities, which are home loans pooled together by
banks that issue them.
"Some commercial and real estate properties will be exposed to
damage from an increase in hurricanes and wildfires or rising sea
levels. Losses will be borne by the owners of these properties and
by institutions holding those assets linked to them, such as
mortgage-backed securities," she added.
Economic and financial risks related to climate change can be
attributed directly to the severe weather events, from the
potential effects of mitigating these effects such as government
policies and technological developments to shifts in the
perceptions of investors and consumers, Kiser said.
The challenge for the Fed though, as it conducts its study, is
in translating climate risk into measurable economic and financial
risks that contribute to the overall stability of the financial
system, Kiser said.
When prompted by Yellen to elaborate, Kiser explained that there
is uncertainty about the likelihood of physical outcomes, like
climate-fueled impacts, as well as government policies to limit or
adapt to those effects. She pointed to geographic and sectoral
differences in climate impacts as well as policies undertaken to
respond to them, and the limited availability of data to make those
links. She said the modeling is difficult and complex, because not
all players, and financial instruments, in the banking system would
be affected the same way.
According to Kiser, the Fed has created a supervision and climate
committee and a financial coordinating committee to assist its
efforts to understand how financial institutions and banks can be
made resilient to climate risk. The former taps the expertise of
the senior staff to assess and ensure the resilience of supervised
institutions, while the latter looks at how to shore up banks and
markets against climate risks.
Rodney Hood, who chairs the National Credit Union Administration
Board (NCUA), reminded the council of the microeconomic effects of
climate change.
Most credit unions focus on mortgage, auto, and small business
lending, but over time, Hood said, climate change will affect the
collateral value of homes and commercial properties, especially in
areas covered by extreme weather, as well as vehicles, particularly
as more electric or hybrid vehicles are bought.
Hood also warned that credit unions that are tied to an
industry, such as an oil industry, will have to readjust their
membership or models to adapt to an economy that is transitioning
to net zero.
Climate Hub at the Treasury
Yellen noted that it wasn't enough for the council to just look
at lessons learned from the economic shock the US financial system
experienced after the pandemic-induced lockdown a year ago. The
country must anticipate and prepare for emerging risks, notably
climate impacts.
"Climate change is obviously a big one," she said, adding that
storms are striking with more frequency and intensity, leading to
disruptions to food and water supplies and resulting in worldwide
unrest.
The US financial system must be prepared for the market and
credit risks that climate-related events pose well as a transition
to a net-zero economy, which also will have its fair share of
potential challenges.
She said the Treasury is setting up a climate hub that will
focus on climate finance opportunities to support the US economy's
transition to net zero, "and that will complement FSOC's work on
climate-related risk."
Representatives of other regulatory agencies that have a stake
in the US financial system also spoke of the efforts each is making
to address the impacts of climate change. These included the heads
of US Securities and Exchange Commission, which is seeking public comment to
improve climate risk reporting by publicly traded companies, and
the Commodity Futures Trading Commission, which in March announced it was creating a new
unit to facilitate with price discovery of any new derivative and
futures products related to climate risk.
Also speaking at the meeting were the heads of the Federal
Deposit Insurance Corporation, the Consumer Protection Bureau, and
the Federal Housing Commission.
Ceres, a network of investors interested in pursuing sustainable
solutions, recommended in a June 2020 report on the role of
financial regulators that FSOC make climate impacts a priority.
The FSOC's emphasis on climate was welcomed by observers who
have been pushing for this development.
"We are very pleased that the first meeting Secretary Yellen
presided over had climate change as an agenda item," said Steven
Rothstein, managing director of Ceres Accelerator for Sustainable
Capital Markets, said 1 April.
By agreeing to consider climate impacts, Rothstein said, Yellen,
Powell and other financial regulators sent "a very positive signal"
to investors and markets.
"Climate change is the exact type of risk the FSOC was designed
to address. It is a large & cross-cutting risk that implicates
every single regulator," Greg Gelzinis, associate director for
economic policy at the Center for American Progress, wrote in a 31 March tweet as he followed
the FSOC meeting.
Posted 01 April 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit
