The Fed Has Climate Responsibilities, Like It Or Not

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Federal Reserve Chairman Jerome Powell said the Fed is not and will not be a “climate policy maker”.

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Kevin Diesch/Getty Images

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About the Author: David Arkush Director of the Public Citizen Climate Program and a fellow at the Roosevelt Institute. In a previous role, he helped pass and implement the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. Yevgeny Shrago is the Policy Director of the Public Citizen Climate Program. In previous roles, he has served as an attorney advisor in the Treasury Department’s Office of General Counsel as well as the Consumer Financial Protection Bureau’s Office of Supervisory Policy.

The US Federal Reserve is not and will not be a “climate policy maker”, Federal Reserve Chairman Jerome Powell told an audience in Stockholm earlier this month. It is not clear who is urging the agency to create a climate policy. What is clear—even Powell agrees in principle—is that the Federal Reserve is responsible for addressing climate-related risks to the banking and financial system. On that score, it’s falling short.

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The risks are huge. The US Financial Stability Oversight Council, a watchdog created after the 2008 economic crisis to monitor and prevent potential new meltdowns, has described climate risk as “An emerging threat to financial stability,

hall of council annual statement A terrifying launch is included. The increasing frequency and severity of climate-related disasters such as Hurricane Ian last summer could make more properties Insurance eligible. If it does, it could be triggering loss of billions For banks and government-sponsored enterprises, such as Fannie Mae, which ultimately hold the mortgage loans secured by that real estate. Some of those same institutions were closely associated with the bad loans that triggered the 2008-era crisis and bailouts.

Along with these physical impacts, banks must also navigate the current clean-energy transition. If it moves at the required pace, this economic transition has the potential to be faster and more disruptive than at any other time in human history. Excessive bank lending to industries that fail to adapt, such as fossil fuels, can trigger instability and may even require bailouts.

By a guessIf banks continue on their current course of investment, a rapid transition could damage $300 billion in lending to the fossil fuel industry alone, raise unemployment to nearly 4% and require a $3.2 trillion bailout . This exposure may help explain why the Federal Reserve chose to reduce the requirements to a pandemic-era loan program designed to preserve financial stability while allowing more oil and gas companies to participate.

many analysts have for decades grossly underestimated The pace of the clean-energy transition. the cost of renewable energy refused and market penetration Expansion faster than expected, year after year. The adoption of the Inflation Reduction Act and a major package of climate policies in California will accelerate the transition dramatically.

The Fed has the authority and responsibility to reduce physical and transmission risks directly. Congress tasked the Fed with monitoring the largest banks for safety and soundness and gave it a major role in mitigating threats to financial stability under the Dodd-Frank Act. Powell acknowledged this role in his recent remarks, noting that the Fed has a “narrow, but important responsibility” that requires banks to “understand and appropriately manage” climate-related financial risk. .

The Fed has begun to act on that responsibility, although it has taken only small steps, and has done so at a much slower pace than its peers. In late December, the Federal Reserve followed other federal banking regulators in proposing principles for how big banks should manage climate risk. The draft falls short on concrete expectations about what banks should actually do, or the consequences if they fail to act. But it’s a start. And regulators have said they will follow with more detailed guidance.

The European Central Bank, in contrast, is announced that it expects banks to fully implement a more prescriptive set of expectations by 2024, including incorporating climate risk into their internal capital adequacy assessments. The ECB is not acting under a separate mandate, nor as a “climate policy maker”. It is acting more assertively because it is taking its safety and security mission seriously. it’s and the bank of england has found Many European banks are sensitive to climate-related financial risks and unprepared to manage them. There is no reason to think that American banks are any different.

Narrow, broad – one can delineate the Fed’s role on the climate and the financial system, but it is essential. It is concerning that Powell’s words and deeds show that he does not think so, keeping him in step with regulators in countries with similar status. If the Fed continues to take this approach, there is every chance that US banks and the financial system will be dealt destabilizing shocks for which they are unprepared. Let’s hope that the majority of people on the Federal Reserve Board see the issue differently.

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