Powell confirms climate stress tests on the way

January 12, 2022|Written by David Clarke|Federal Reserve

Federal Reserve chair Jerome Powell has confirmed that climate stress tests will be an important priority for him if he is confirmed for a second term.

Climate stress tests were among the recommendations endorsed by top regulators in last year’s Financial Service Oversight Council (FSOC) report on climate-related financial risks. However, yesterday’s remarks were the strongest support Powell himself has given to the idea.

He was speaking during a confirmation hearing before the US senate banking committee, responding to a question from Democratic senator Sherrod Brown. Brown asked if the Fed will follow FSOC’s recommendations including implementing climate stress tests for the biggest banks.

“We are looking at climate stress tests. I think it’s very likely that climate stress scenarios, as we like to call them, will be a key tool going forward,” said Powell.

Powell noted that the scenarios are different from stress tests that affect capital, adding that at this stage they “are really about assuring that the large financial institutions understand all of the risks that they’re taking, including the risks that may be inherent in their business model regarding climate change over time.”

Stress tests are seen as a key tool in assessing the financial system’s ability to withstand climate risks, and in ensuring banks take such risks seriously. The European Central Bank plans to carry out a supervisory climate stress test this year, and the Bank of England expects to publish the results of its 2021 exercise in the spring.

Lael Brainard – Biden’s nominee for vice chair who will attend her own confirmation hearing on Thursday – has been more vocal in her support for stress tests. She told a Boston Fed conference in October that the existing bank stress test framework could be used as a template. She said it would be helpful to “start down the path”, even with a rudimentary first attempt that could be subsequently improved upon.

Meanwhile, researchers at the Federal Reserve Bank of New York have developed a stress testing procedure which they published in September. Reuters recently reported that top Wall Street executives expect the Fed to conduct its first such exercise and release the findings by 2023.

During the hearing, Powell sought to reassure Republican members of the committee such as Pat Toomey, who expressed concern that the Fed’s actions on climate change may overstep its mandate. Powell said that although the broader answer to climate change should come from legislators and the private sector, the Fed will act where issues for banks arise.

This page was last updated January 12, 2022

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