Speaking at the New York Times DealBook conference yesterday, Treasury Secretary Janet Yellen reiterated Federal Reserve Board remarks from last week about the movement toward stress testing, and scenario analysis, as tools for managing climate-related risks.
On February 18, 2021, Federal Reserve Board Governor Lael Brainard spoke before the IIF U.S. Climate Finance Summit. She stated, “Supervisors have a responsibility to ensure that financial institutions are resilient to all material risks—including those related to climate change—both currently and into the future.” She added that this would require sustained effort from regulators and financial institutions to invest in expertise, modeling, and data along with a “willingness to learn and improve over time.”
FRB governor Brainard highlights:
- Scenario analysis may be helpful to assess microprudential and macroprudential implications of climate-related risks. Scenario analysis is distinct from traditional regulatory stress testing, but the two exercises may complement one another.
- Moving toward standardized, reliable, and mandatory disclosures could provide better access to the data required to appropriately manage risks.
- While there are benefits to standardization in some areas, such as data and taxonomies, “it is not clear a highly prescriptive approach would be the most effective way to ensure financial institutions are well-prepared for the range of possible impacts of climate change, even if the execution burden is low.”
- FRB’s new Supervision Climate Committee (SCC) will work to develop a program to ensure the resilience of supervised firms to climate-related financial risks. It is engaging with both the private sector (supervised institutions and industry groups) and official sectors (regulatory agencies, central banks, and standard-setting bodies).
- FRB is co-chairing the BCBS Task Force on Climate-Related Financial Risks. At the Network for Greening the Financial System (NGFS) it is engaged in work related to the microprudential and macrofinancial impacts of climate change, trends in green finance, data gaps, and research.
Treasury Secretary Yellen separately acknowledged that the FRB is looking into climate-related stress testing and suggested that Treasury might be able to facilitate this effort. She added that such tests would not have “the same status in terms of limiting payouts and capital requirements” but would assist both regulators and financial services companies in assessing risks.
During her confirmation hearing, Ms. Yellen stated she intended to appoint a senior-level official to focus on assessing the financial stability risks and tax policy incentives around climate change.
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