(March 26, 2021) Two new Federal Reserve committees will focus on the impact of climate change on financial stability, Fed Board Gov. Lael Brainard said this week, as the agency finds it “increasingly clear” that climate change could have “important implications” for the central bank in carrying out its responsibilities.
Climate change and its impact on credit union regulation was a key topic at last week’s virtual National Meeting of state regulators, sponsored by NASCUS. Brainard made her remarks in a speech this week to a New York-based group focusing on addressing climate change and other issues.
Brainard said the new Supervision Climate Committee (SCC) will address the microprudential side by strengthening the agency’s ability to consider climate change risk and develop an “appropriate program to ensure the resilience of our supervised firms” to the risks posed.
The second committee – the Financial Stability Climate Committee (FSCC) – will, Brainard said, identify, assess, and address climate-related risks to financial stability through a macroprudential approach (one that considers the potential for “complex interactions across the financial system,” she said). In that regard, she added, it will complement the work of the SCC.
“Microprudential and macroprudential objectives are often aligned,” she said. “For example, consistent disclosures are important not only to enable individual financial firms to measure and manage their exposure to climate-related financial risks, but also to support financial stability more broadly by helping the market to accurately price that risk. Given the importance of consistent, comparable, and reliable disclosures to financial stability and prudential objectives, mandatory disclosures are ultimately likely to be important.”
She also said the Fed is investing in new research, data, and modeling tools to support the work of the committees. “In light of the high uncertainty inherent in estimating climate-related shocks, scenario analysis may be a helpful tool to assess the effects on the financial system under a wide range of assumptions,” Brainard said. “Climate scenario analysis identifies climate-related physical and transition risk factors facing financial firms, formulates appropriate stresses of those risk factors under different scenarios, and measures their effects on financial intermediaries and the financial system.”