November 24, 2022
  • November 24, 2022

EXCLUSIVE Fed Lobby Big Banks Privately Over Climate Change Risks

By on May 12, 2021 0

Houses stand in floodwaters caused by Hurricane Florence, in this aerial photo, on the outskirts of Lumberton, North Carolina, United States, September 17, 2018. REUTERS / Jason Miczek

The U.S. Federal Reserve has asked lenders to start reporting the steps they are taking to mitigate climate change risks on their balance sheets, according to four people with knowledge of the matter.

Previously unreported surveillance talks highlight how U.S. watchdogs are acting to execute President Joe Biden’s agenda to embed climate risk into the financial regulatory system, with potentially major ramifications for Wall Street.

While European regulators are deploying climate change stress tests for lenders this year, the Fed is lagging behind its peers. Read more

Fed officials have previously said they are considering a new scenario analysis to help them understand how climate change could affect billions of dollars in bank assets, but have not said how or when they will start. apply such tests. Read more

In private talks, however, Fed supervisors began pressuring major lenders to detail the steps they are taking to understand how their lending books performed under certain climate change scenarios, said. the four people.

Fed officials did not dictate the parameters of the analysis, but made it clear that they expect lenders to conduct internal risk management exercises and pass on the data, people said.

This analysis includes testing the geographic exposure of bank assets to physical risks such as floods, droughts and forest fires, as well as testing exposures to different sectors, such as the performance of oil and gas loans versus renewable energy loans.

The purpose of the tests is to identify risks, but the Fed has not indicated that the data it collects will result in additional capital charges or other regulatory measures.

“They are very pragmatic. They do their homework,” said one of the people.

World banks – including JPMorgan (JPM.N), Citigroup (CN), Wells Fargo (WFC.N), Bank of America (BAC.N), Goldman Sachs (GS.N) and Morgan Stanley (MS.N) – – have been exploring the implications of climate change for some time, both internally and in some cases with European regulators like the Bank of England more aggressively integrating climate change risks into the regulatory framework.

Still, the US central bank‘s new climate control is adding pressure on Wall Street lenders, forcing them to invest in technology, data management and people.

“The data work is a big deal,” said another source.

Banks did not immediately respond to requests for comment on private talks with the Fed.


Climate change could disrupt the financial system as physical threats such as sea level rise, as well as carbon neutral policies and technologies aimed at slowing global warming, could destroy billions of dollars in assets, according to risk experts.

In a 2020 report, a Commodity Futures Trading Commission panel cited data estimating that $ 1-4 trillion in global wealth related to fossil fuel assets could be lost.

In January, the Fed appointed Kevin Stiroh, one of its top supervisors, to lead a new team focused on climate-related financial risks, but some Congressional Democrats are pushing the central bank to act much faster and add more climatic risks to the stress tests of the banks that dictate Wall Street’s capital plans.

In March, Fed Governor Lael Brainard said that testing climate scenarios could be useful, but that they would also be based on qualitative judgments and would be very uncertain.

Fed Chairman Jerome Powell said the agency would exercise caution and focus on mainstreaming climate change into existing regulatory obligations, instead of creating tough new rules. It is unclear, however, if he will be re-appointed to lead the Fed after his term expires next year, while his vice president Randal Quarles, appointed Republican who oversees banking regulation, is expected to step down this year.

Progressive groups say the central bank could do a lot more to tackle climate risks, even if it doesn’t want to go as far as its European counterparts. Read more

Tim Clark, a former senior Fed official who helped build his stress tests after the 2008 financial crisis, said he should communicate publicly that he expects banks to build climate change into their risk management processes.

“It’s something that they can basically start right now and let the industry know that they expect banks to work hard on this.”

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