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The Federal Reserve Board Meeting in 2019 Photo: Federal Reserve
Globally there is an effort to encourage or even require major financial institutions to consider climate risks to their portfolios and to report them to the public and their customers. Politico reports that 47 Republican Members of Congress wrote the Chair of the Federal Reserve Board, Jerome Powell, to urge that the Fed refrain from requiring banks to conduct “stress” tests to determine their vulnerability to climate change. They also argued that the Fed should not join the international Network for Greening the Financial System, a group of major banks and banking regulators focused on mitigating financial shocks that are due to climate risks.
Why This Matters: Really? Does failing to test the ability of banks to withstand a major financial risk make the risk go away? This is climate denial that will really cost our economy. Stress tests should look at climate change as a real risk — if we fail to do so, we won’t know which banks have taken on too much risk as a result of things like mortgage loans in flood-prone areas. The Republicans argue the Fed will be “creating financial stress for politically incorrect, disfavored industries.” When a bank goes under due to a climate catastrophe — who do you think pays? We all do.
One way we keep banks from taking on too much financial risk is for the Fed to regularly do “tests” on large banks to measure their ability to withstand adverse economic conditions like those prevented by a major pandemic or a major climate catastrophe like a hurricane hitting a major U.S. city head-on. What’s really going on is that Republicans fear that banks will continue to walk away from financing fossil fuel projects and will begin to cut ties with some in the energy industry due to what they see as a politically motivated rule about climate change. One might argue that the Republicans are the ones exerting undue pressure that is driven by their political motivations to prop up fossil fuel companies to enter into deals that make no financial sense given the risks and inevitability of climate change losses.
Powell of course was installed as Chair of the Fed by President Trump — it is not as if he is siding with the Democrats because of political sympathies. However, the letter may have been sent in anticipation of the incoming Biden administration, which is expected to take a hard look at climate vulnerabilities in the banking sector — the Biden administration and Treasury Secretary nominee Janet Yellen have said they intend to make shoring up climate risk and improving our nation’s resilience to climate change a high priority. Banks in the U.K. and Europe are already beginning to be more active in addressing climate risks, such as the recent decision by the Bank of England to develop climate stress tests.
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