Fed governor anticipates new guidance on climate change for big banks

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  • Federal Reserve Governor Lyle Brainard said Thursday that the Fed is developing scenario analysis tools to model the economic risks of climate change and assess the resilience of the entire financial system.
  • He indicated that the central bank would provide supervisory guidance on climate change to help banks mitigate their risks.
  • The Fed is being moved by other major central banks, including the European Central Bank and the Bank of England, to evolve climate scenarios.

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The US Federal Reserve should step up efforts to assess the exposure of large banks to financial risks related to climate change, Fed Governor Lyle Brainard said on Thursday.

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Brainard said the Fed, which oversees the nation’s largest banks, is developing scenario analysis tools to model the economic risks of climate change and assess the resilience of the entire financial system. He also indicated that the Fed would provide supervisory guidance on climate change to help banks hedge their risk.

Damage from worsening storms, floods, droughts and wildfires are among the threats to climate change that can cause massive damage and damage the economy.

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“I hope following the lead of many other countries will be helpful in providing supervisory guidance for large banking institutions in their efforts to appropriately measure, monitor and manage physical climate-related risks,” said Brainard. said in virtual speech For the Boston Fed Research Conference.

The move to develop climate scenarios and potentially provide guidance to banks puts the Fed in line with other major central banks, including the European Central Bank and the Bank of England.

The Fed has begun to take a more active role in climate change, including creating two internal committees focusing on the issue and joining the Global Network for Greening the Financial System.

Brainard’s remarks also come as Fed Chairman Jerome Powell, whose term expires on February 5, 2022, faces mounting resistance to a possible re-nomination by progressive Democrats who have criticized issues such as financial regulation and climate change. But he has been criticized.

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Powell said earlier this year that the Fed would require banks to conduct their own tests to assess how vulnerable they are to climate change. He has also said that climate change is not a main consideration for the central bank when formulating monetary policy.

Brainard said regulators face “substantial work” in addressing data gaps to assess banks’ climate-related risks. He said the scenario analysis could also focus on how financial institutions can insure or protect themselves against climate-related risk.

“While reinsurance contracts and agreements between investors may transfer risk across the financial system, some level of risk is likely to remain,” she said. “Climate-related risks can build up in hidden ways that can result in widespread damage.”

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