FED recently created the Supervision Climate Committee, or SCC, for micro-prudential policy work and the Financial Stability Climate Committee, or FSCC, for macro-prudential policy work to address climate-related risks. The FED Governor Lael Brainard made this announcement at a conference in Boston, Massachusetts. While discussing the financial stability implications of climate change, the Governor highlighted that, in certain situations, micro-prudential and macro-prudential goals do not fully align, which is why it is important to consider the implications for the safety and soundness of individual firms as well as for the broader financial system. However, given the importance of consistent, comparable, and reliable disclosures to both financial stability and prudential objectives, mandatory disclosures are ultimately likely to be important, she said.
From a micro-prudential perspective, the Supervision and Regulation Report of FED discusses how the effects of climate change can manifest in the financial system via traditional channels like credit, market, operational, legal, and reputational risks, which affect the safety and soundness of individual firms. The Supervision Climate Committee has the mandate to strengthen the capacity to identify and assess financial risks from climate change and to develop an appropriate program to ensure the resilience of supervised firms to those risks. The micro-prudential work of the Supervision Climate Committee, which is intended to ensure the safety and soundness of financial institutions, constitutes one core pillar of the FED framework for addressing the economic and financial consequences of climate change.
From a macro-prudential perspective, the Financial Stability Report of FED outlines how climate change could increase financial shocks and financial system vulnerabilities that could further amplify shocks. Addressing macro-financial risks of climate change is the second core pillar of the FED framework to address climate related risks. To complement the work of the the Supervision Climate Committee, FED is establishing a Financial Stability Climate Committee to identify, assess, and address climate-related risks to financial stability. The broad goals of the FSCC are to promote the resilience of the financial system to climate-related financial risks, to ensure coordination with the Financial Stability Oversight Council and its member agencies and to increase the international engagement and influence of FED on this issue. The FSCC will work in close coordination with the Supervision Climate Committee—as well as with the community development, payments, international coordination, and economic research and data areas—to build a coordinated approach to integrating climate-related risks where they affect the FED responsibilities. The overall FED macro-prudential work program is focused on assessing not only potential climate shocks, but also whether climate change might make the financial system more vulnerable in ways that could amplify these shocks and cause broader knock-on effects that could harm households, businesses, and communities.
To support the work of these committees and the broader work throughout the Federal Reserve System, FED is investing in new research, data, and modeling tools. Also, considering the high uncertainty inherent in estimating climate-related shocks, scenario analysis may be a helpful tool to assess the effects on the financial system under a wide range of assumptions, For climate scenario analysis, FED would anticipate long time horizons, substantial uncertainty, the use of qualitative elements, and reliance on external data and models. To capture the potential for complex interactions across the financial system, such scenario analysis would consider the effects on bank and nonbank financial intermediaries and financial markets broadly. FED is also looking at the scenario analysis work underway by policymakers in foreign jurisdictions, such as by ECB and BoE as well as the scenarios developed by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). Since climate change is inherently a cross-border and cross-sectoral challenge, FED recognizes the importance of collaboration across jurisdictions and sectors.
Related Link: FED Update on Climate Risk
Keywords: Americas, US, Banking, Climate Change Risk, ESG, Macro-Prudential Policy, Micro-Prudential Policy, Climate Stress Testing, Disclosures, International Cooperation, Financial Stability, FED