Fed to establish new climate risk panel, Brainard says

(Reuters) – The Federal Reserve will establish a new panel to assess and address risks to financial stability from climate change, Fed Governor Lael Brainard said on Tuesday, a fresh signal the U.S. central bank is intensifying its efforts to manage risks to the financial system from global warming.

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The Fed’s new financial stability climate committee will take a macroprudential approach to the issue, identifying and finding ways to mitigate risks that could harm the financial system as a whole, Brainard said.

The panel will work with a recently established supervision climate committee that is focused on addressing so-called microprudential risks at individual banks.

“It is increasingly clear that climate change could have important implications for the Federal Reserve in carrying out its responsibilities assigned by the Congress,” Brainard said in remarks prepared for delivery to the Ceres 2021 climate change conference.

“Given the implications of climate change for both individual financial institutions and the financial sector as a whole, we need a framework that incorporates both microprudential and macroprudential considerations,” she said.

The Fed’s two panels form the core “pillars” to its new framework for addressing the economic and financial consequences of climate change, Brainard said, adding that those risks included the potential for shocks to the financial system that could ripple out to harm households, businesses and communities.

Senate Republicans last week sent Fed Chair Jerome Powell a letter expressing concern that the Fed would use its bank supervision powers to “further environmental policy objectives,” going “beyond the scope” of the central bank’s mission.

Those Republicans said they were particularly worried about the use of climate scenario analysis, adding that the Fed lacks jurisdiction and expertise in such matters.

Such scenario analysis, Brainard said on Tuesday, could be a “helpful tool” for the Fed, providing “a structured way of uncovering the parts of the financial system where physical, transition, and other risks may have outsized effects through potential spillovers.

The newly established panel, she added, is part of the Fed’s effort to build expertise capacity and knowledge to deal with risks.

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