Fed’s Brainard Says Climate Scenario Analysis Key Tool for Measuring Banking Risks
By Pete Schroeder
WASHINGTON (Reuters) – Federal Reserve Governor Lael Brainard on Thursday said the central bank should continue efforts to assess how banks could be affected by climate change, saying such an analysis would be a key tool for measure the risks.
In a prepared speech, Brainard noted that regulators face “substantial work” to fill data gaps and create new models to properly assess the risks banks face in the face of climate change. But while the Fed should be “humble” about any initial analysis, that shouldn’t deter regulators from developing such tools.
Fed officials have previously suggested that such an analysis, which would assess the performance of banks against hypothetical climate change risks, could be a useful tool to ensure that the financial system is well positioned to navigate a changing climate. . Brainard said the Fed is “actively learning” from regulators in other countries who are more advanced in developing such tests.
At the same time, Brainard noted that there are inherent challenges in modeling and forecasting climate risks that are distinct from the previous stress tests the Fed has built. Existing stress tests measure banks against hypothetical recessions that can be based on historical data, and nothing similar exists for climate risk, she said.
“Analysis of climate scenarios faces the challenge of having to consider plausible but novel combinations of risks that are associated with substantial uncertainty,” she said.
Brainard also noted other new considerations, including that the impact of climate change will not affect all regions of the country in the same way and that traditional bank hedging tools such as insurance may not prove to be true. also effective.
(Report by Pete Schroeder, edited by Peter Graff)