The US Federal Reserve has created a new system-wide committee to focus on macroprudential climate risk to financial stability. The move was announced by Governor Lael Brainard in a speech at a conference organised by Ceres, an organisation working on sustainable economies.
The new Financial Stability Climate Committee (FSCC) will develop and implement a program to “identify, assess, and address climate-related risks to financial stability,” Brainard said. The macroprudential work of the FSCC will complement the recently established Supervision Climate Committee (SCC), focusing on microprudential climate risks and the transition to a sustainable economy.
Outlining the potential financial system shocks and vulnerabilities resulting from climate change, Brainard warned of significant losses on climate-sensitive assets as a result of climatic and environmental changes, a disorderly transition away from carbon, or both.
“Unlike episodic or transitory shocks, climate change is an ongoing, cumulative process, which is expected to produce a series of shocks,” she said. “Over time, these shocks can change the statistical time-series properties of economic variables, making forecasting based on historical experience more difficult and less reliable.”
The difficulty of quantifying climate risk may also prevent market actors from accurately pricing climate risks, Brainard warned, leading to the danger of abrupt changes in asset valuations. In response, the new FSCC will “promote the resilience of the financial system to climate-related financial risks, ensure coordination with the Financial Stability Oversight Council and its member agencies, and increase the Federal Reserve’s international engagement and influence on this issue.”
The Fed is also investing in new research, data and modelling tools, Brainard said, and is learning about scenario analysis from work done by the European Central Bank, the Bank of England and the Network of Central Banks and Supervisors for Greening the Financial System.
Both the FSCC and the SCC are part of the Fed’s efforts to understand the implications of climate change after it first recognised climate as a potential threat to financial stability in its Financial Stability Report.
This page was last updated May 11, 2021
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