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The Fed’s Brainard hints that climate change guidance may be on the way for big banks.

The Fed’s Brainard hints that climate change guidance may be on the way for big banks.

Federal Reserve Governor Lyle Brainard has given the clearest signal yet that America’s central bank is about to begin to seriously assess the exposure of large banks to climate-related financial risks.

Ms Brainard said the Fed is in the process of developing a climate-related scenario for use in the bank’s security checks, often called stress tests. He also supported the use of supervisory guidance — the Fed’s recommendations to banks — to encourage financial institutions to hedge their exposure.

“I hope following the lead of many other countries will be helpful in providing supervisory guidance for large banking institutions in their efforts to appropriately measure, monitor and manage risks related to physical climate,” said Ms. Brainard. , speaking from prepared remarks for the Fed Research Conference.

Ms Brainard said the Fed is also assessing climate-related risks from a broader perspective – trying to figure out what melting ice caps and massive wildfires mean for the financial system as a whole. can.

“We are developing scenario analysis to model potential financial risks associated with climate change and assess the resilience of individual financial institutions and the financial system to these risks,” she said.

The fact that this evolving climate landscape puts the Fed in line with its global counterparts, including the European Central Bank and the Bank of England, is investigating how climate-related risks to the banking sector can be addressed. what could mean. It also comes at a time when the Fed — and Jerome H. Powell, its leader – has faced backlash for moving slowly toward a more concrete climate push.

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Mr Powell also suggested the Fed would test banks’ exposure to climate problems, although his remarks to lawmakers during testimony last week were not as definitive or detailed as Ms Brainard’s. He explained that the Fed’s goal was to ensure that regulated banks could manage any risks that pose a threat, such as climate change.

“Scenario analysis is almost certainly going to be one of the key tools for doing this,” Mr. Powell said.

The central bank oversees the largest banks in the country, including institutions such as Goldman Sachs and Bank of America.

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