Federal Reserve Chairman Jerome Powell is preparing for a hearing of the House Financial Services Committee on “Monitoring the Pandemic Response of the Treasury Department and the Federal Reserve” in the office building of the Treasury Rayburn House in Washington, DC on December 2, 2020.
Jim Lo Scalzo | Reuters
The Federal Reserve has taken a step that cements its head with the risk that climate change may pose to the financial system.
In a statement issued on Tuesday, the central bank said it has formally joined a global peer group that is addressing the impact of climate on finances. The Network of Central Banks and Supervisors for the Energization of the Financial System, as they say, was formed in 2017 and now has 83 members from around the world. The United States had already participated informally for more than a year.
“As we develop our understanding of the best way to assess the impact of climate change on the financial system, we look forward to continuing and deepening our discussions with our … colleagues around the world,” Jerome said. H. Powell, chairman of the Federal Reserve Board. a statement.
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The issue of climate change has become a more pronounced issue in the Fed, in light of the persistent trend of higher average temperatures and environmental changes such as rising sea levels and more frequent intense weather events.
For example, in its most recent financial stability report, the Fed explored climate change for the first time and said, in part, that “Federal Reserve supervisors expect banks to have systems that identify, measure, properly control and control all of their resources material risks, which for many banks are likely to extend to climate risks. “
The translation is that if these hazards are not taken into account, hazards such as storms, floods, droughts or forest fires could change the value of the assets suddenly, causing a shock to the system.
At this point, it is uncertain how the Fed’s involvement in the global network will affect policy and regulation. Although Democrats had urged membership, last week about 50 Republican lawmakers in Congress sent a letter to the Fed asking it to slow down and avoid pursuing proposals elsewhere that would force banks to consider climate change in stress tests. (These tests are usually a way for regulators to assess a bank’s financial soundness by requiring them to run scenarios of what’s going on?).
The letter also expressed concern that introducing aspects of climate change into these measures could have a chilling effect on banks’ willingness to extend credit to industries such as coal, oil and gas.
However, the action was applauded by the non-profit accelerator Ceres Accelerator for Sustainable Capital Markets.
“This news … is a clear indication that the agency recognizes its role in addressing the systemic risk of climate change,” Steven Rothstein, the group’s CEO, said in a statement.