Finance

Fed vice chair says bank will launch pilot climate risk analysis next year

Michael S. Barr, nominee to be a member of the Board of Governors of the Federal Reserve System, is sworn in during his Senate Banking, Housing, and Urban Affairs Committee nomination hearing on Thursday, May 19, 2022.
Greg Nash
Michael S. Barr, nominee to be a member of the Board of Governors of the Federal Reserve System, is sworn in during his Senate Banking, Housing, and Urban Affairs Committee nomination hearing on Thursday, May 19, 2022.

The Federal Reserve’s top regulatory watchdog said Wednesday the bank will test out ways next year to help financial firms figure out the risks they face from climate change and climate-related events.

Fed Vice Chair of Supervision Michael Barr said in a Wednesday speech the bank will launch a pilot exercise next year for the major banks it supervises to help get a better sense of the risks climate change poses to the financial system. The exercise would likely require firms to explain how several different climate-related financial shocks would affect their books and ability to serve customers.

“The Federal Reserve is working to understand how climate change may pose risks to individual banks and to the financial system,” Barr said in a Wednesday speech at the Brookings Institution, a nonpartisan think tank.

Barr’s remarks were his first since being confirmed to the Fed in July as the bank’s top regulatory official. As vice chair of supervision, Barr spearheads the Fed’s oversight of major financial firms, including the Fed’s annual stress testing of the largest U.S. banks.

“The Federal Reserve’s mandate in this area is important, but narrow, focused on our supervisory responsibilities and our role in promoting a safe and stable financial system,” Barr said.

Since President Biden’s election in 2020, the Fed has moved toward studying the various ways climate change and a global shift away from fossil fuel energy could affect the financial system. 

Financial experts say banks and financial firms could face steep losses as the pace and intensity of natural disasters increase, causing massive insurance payouts and reducing the value of properties in areas prone to extreme weather. A steep, steady reduction in fossil fuel usage and uptake of renewable energy sources could also trigger shockwaves through the financial system.

While central banks and financial watchdogs around the world have largely agreed on the need to assess climate-related financial risks, the issue is politically divisive in the U.S.

Democrats have long pushed the Fed and other financial regulators to pay closer attention to the ways climate change could rattle the financial system. Some progressive lawmakers and activists have also called on the federal government to steer financing away from fossil fuel-related projects and toward initiatives meant to fight climate change.

Fed officials from both parties have said the bank should and will study the ways climate change could pose risks to the banks it regulates but have refused to use its regulatory power in pursuit of climate-related goals.

Those assurances have done little to convince Republican lawmakers, who have blasted the Fed for even considering climate-related financial risks and accused the bank of plotting against politically disfavored industries.

Tags Biden federal reserve Joe Biden Michael Barr
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