The Federal Reserve has taken another step forward in efforts to ensure that the financial system is protected from climate risks.
As the central bank increasingly turns its attention to the issue, the Fed has created a Financial Stability Climate Committee and a Supervisory Climate Committee.
The panels will focus on “the potential for complex interactions across the financial system,” Fed Governor Lael Brainard said in comments on Tuesday.
“Climate change and the transition to a sustainable economy also pose risks to the stability of the broader financial system. Therefore, a second central pillar of our structure seeks to address the macro-financial risks of climate change, ”added Brainard.
The Climate Oversight Committee will focus on identifying risks and developing a program to address them. The Climate Financial Stability Committee will address “macroprudential risks” on how the climate can pose systemic risks for institutions overseen by the Fed.
While tackling the climate issue represents an expansion of the Fed’s role in overseeing banks and other financial institutions, officials have emphasized the potentially damaging impact that climate-related events can have on the system.
The central bank has started asking large institutions to assess the potential impact of the climate and how they are prepared to face significant events. Brainard was the first Fed official to start talking about the issue, saying in late 2019 that he wanted his colleagues to start considering how climate events could impact monetary policy.
“Financial market participants who do not implement structures to assess and address climate-related risks can face significant losses in climate-sensitive assets caused by environmental changes, a disorderly transition, or both,” said Brainard.
She added that “robust risk management” in a number of areas “can help ensure that the financial system is resistant to climate-related risks and well positioned to support the transition to a sustainable economy.”
However, the movement to deal with climate change has received some resistance from Republicans in Congress, who fear the Fed is exceeding its existing mandate.
At a hearing on Tuesday before the House Financial Services Committee, Fed chairman Jerome Powell faced doubts about whether the central bank should be involved in the matter.
For his part, Powell indicated that climate change is not central to the Fed’s mission, but it is important.
“It’s really too early to try to understand what it all means. Of course, it can have long-term implications for our economy, our financial system and the people we serve,” said Powell. “It is still early, but we feel that we have a responsibility to start the process of understanding” the risk.
Powell said that examining the impact of climate change is part of ensuring that institutions are “resilient” in the face of risks.