Lael Brainard, Governor of the U.S. Federal Reserve, speaks at the National Association of Business Economics (NABE) annual meeting in Arlington, Virginia on Monday, September 27, 2021 .Al Drago | Bloomberg | Images
The US Federal Reserve is expected to step up efforts to assess the exposure of major banks to financial risks from climate change, Fed Governor Lael Brainard said Thursday.
Brainard said 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. She also signaled that the Fed would provide watchdog advice on climate change to help banks mitigate their exposure.
Damage from worsening storms, floods, droughts and inceForest is one of the risks associated with climate change that could cause massive losses and hurt the economy.
"I think it will be useful to provide oversight advice to large banking institutions in their efforts to appropriately measure, monitor and manage significant climate-related risks, following the lead of a number of other countries, "Brainard said in virtual speech for a Boston Fed research conference .
The move to develop climate scenarios and potentially provide guidance to banks puts the Fed more in line with what other major central banks are doing, including the European Central Bank and the Bank of England.
The Fed has started taking a " bigger acti ve role in climate change , including the creation of two internal committees focusing on the issue and joining the global network for the Greening of Finance System.
The remarks of Brainard are also intervening as Fed Chairman Jerome Powell, whose term expires on February 5, 2022, faces growing resistance to a possible reappointment by Progressive Democrats, who have criticized him on issues like regulation finance and climate change.
Powell said earlier this year that the Fed would likely require banks to do their own tests to assess their vulnerability to climate change. He also argued that climate change is "not a primary consideration for the central bank when formulating monetary policy.
Brainard said theRegulators are facing "substantial work " to fill data gaps in order to assess climate risks for banks. The scenario analysis can also focus on how financial institutions can insure or hedge against climate-related risks, she said.
"While reinsurance contracts and investor agreements can transfer risk through the financial system, some level of risk is likely to remain, "she said. "Climate-related risks could accumulate in hidden ways, which could lead to cascading losses.