FRB Governor Waller Says Climate-related Financial Risks Do Not Merit "Special Treatment"

Federal Reserve Board ("FRB") Governor Christopher J. Waller argued that climate-related risks do not merit "special treatment" when monitoring the financial stability of the United States.

In a speech before the Banco de España – Federal Reserve Bank of St. Louis which was held at IE University, Mr. Waller stated that while "climate change is real," it does not pose a "serious risk to the safety and soundness of large banks or the financial stability of the United States." To determine whether financial risks stemming from climate change are more material than other sources of risk, Mr. Waller considered both (i) physical risk and (ii) transition risk as climate-related financial risks that could potentially impact financial stability.

Physical Risk

Mr. Waller stated that physical risk (i.e., the potential for "higher frequency and severity of acute events") can impact properties by driving down their value as a result of natural disasters. He said that it is unlikely climate related risk would greatly affect bank performance because of (i) the way that banks effectively price physical risks from climate change into loan contracts and (ii) the lack of evidence that natural disasters would have an "outsized effect" on U.S. growth rates.

Mr. Waller also examined a "more compelling concern" that property value declines occur instantaneously and on a large scale, which he said, could result in a loss for banks. However, Mr. Waller said that financial institutions are already taking steps to account for such risks. Further, to address concerns that repricing of property could spread to the broader financial system, he referenced the previous year’s stress tests where the largest banks were able to absorb approximately $100 billion in losses on loans collateralized by real estate.

Transition Risk

Additionally, Mr. Waller asserted that transition risks (i.e., risks associated with an "economy and society in transition to one that produces less greenhouse gases"), when orderly, are neither near-term concerns nor material due to (i) their "slow-moving nature" and (ii) the ability of market participants to price transition costs into contracts.