Climate change represents a real danger to the U.S. financial system and both the U.S. Federal Reserve and the Department of the Treasury plan to mitigate the risks.
Fed Chairman Jerome Powell, Federal Reserve Board Governor Lael Brainard and Treasury Secretary Janet Yellen reaffirmed the Biden administration's commitment to assessing the risks climate change might inflict on the financial system.
Brainard on Tuesday announced the formation of the Fed's new Financial Stability Climate Committee and Supervision Climate Committee.
"Climate change and the transition to a sustainable economy also pose risks to the stability of the broader financial system." said Brainard.
"So a second core pillar of our framework seeks to address the macro financial risks of climate change."
She noted the examples of both California and Florida where insurance companies have moved away from insuring properties with flood or fire risk, or have raised insurance rates, to cope with climate change catastrophes such as massive floods and powerful hurricanes.
"The abrupt changes to a wide range of contracts that embed systemic mispricing could initially amplify the shock," according to Brainard.
"A lack of transparency across participants in the financial sector could cause climate-related risks to build up in hidden pockets, embedding vulnerabilities that could result in cascading losses in the event of large-scale adverse weather outcomes or other shocks to asset valuations."
Powell told members of the House Financial Services Committee Tuesday the central bank is "at a very early stage of understanding the risks to regulated financial institutions from climate change."
Powell said if the Fed chose to run scenario analyses on climate risk, there would be "no regulatory consequences."
"We're not trying to measure or quantify something right now," he said. "We're trying to understand at a high level, what is the nature of the risks that will affect banks over time from climate change."
Yellen told the same committee climate-related scenario analysis will enable "financial institutions and ... regulators to better understand the risks that climate change pose to the health and resilience of core financial institutions, and it will help those institutions better manage and understand the risks."
