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FRB Governor Describes Progress in Developing Climate-Related Risk Framework

Federal Reserve Board Governor Lael Brainard described challenges and solutions for incorporating climate-related risk assessments into supervisory frameworks.

At the "2021 IIF U.S. Climate Finance Summit: Financing a Pro Growth Pro Markets Transition to a Sustainable, Low-Carbon Economy," Ms. Brainard warned that "financial institutions that do not put in place frameworks to measure, monitor, and manage climate-related risks could face outsized losses on climate-sensitive assets caused by environmental shifts, by a disorderly transition to a low-carbon economy, or by a combination of both." She differentiated between (i) "physical risks," such as damage caused by extreme climate shifts, and (ii) "transition risks," including sudden or anticipated changes in policy, technology or consumer behavior.

Ms. Brainard described climate scenario analysis as a tool in the assessment of climate risks. She clarified that "scenario analysis is distinct from our traditional regulatory stress tests at banks," as scenario analysis assesses business model resiliency in long-run scenarios versus a traditional stress test, which assesses capital adequacy over the short run. Ms. Brainard expressed caution in taking a "prescriptive approach" to scenario analysis, instead suggesting "leverag[ing] a range of complementary approaches . . . in both the private and public sectors."

Ms. Brainard noted progress on incorporating climate related risk into a supervisory framework:

  • the FRB Supervision Climate Committee is developing a program to ensure resiliency of supervised firms as part of the FRB's congressionally mandated responsibility; and
  • the Basel Committee on Banking Supervision's Task Force on Climate-Related Financial Risks ("TFCR"), which has completed an assessment of existing regulatory initiatives, is compiling a report that explores the transmission channels of climate risks. The TFCR next will develop supervisory practices where it finds potential gaps in the Basel framework.


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