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The Federal Reserve is preparing the American financial system to withstand climate change, Chair Jerome Powell tells Democratic Sen. Brian Schatz

Key Points
  • The Federal Reserve is taking steps to prepare the American financial system for the effects of climate change, according to Fed Chairman Jerome Powell.
  • But Powell notes that climate-related risks do not fit squarely within the central bank's existing framework for assessing financial stability.
  • "As I have commented previously, although addressing climate change is a responsibility that Congress has entrusted to other agencies, the Federal Reserve does use its authorities and tools to prepare financial institutions for severe weather events," Powell writes to Sen. Brian Schatz, D-Hawaii.
Federal Reserve Chairman Jerome Powell speaks during a discussion at the Economic Club of Washington on January 10, 2019, in Washington, DC.
Saul Loeb | AFP | Getty Images

The Federal Reserve is taking steps to prepare the American financial system for the effects of climate change, according to Chairman Jerome Powell.

But Powell noted that climate-related risks do not fit squarely within the central bank's existing framework for assessing financial stability.

"As I have commented previously, although addressing climate change is a responsibility that Congress has entrusted to other agencies, the Federal Reserve does use its authorities and tools to prepare financial institutions for severe weather events," Powell wrote in an April 18 letter to Sen. Brian Schatz, D-Hawaii.

Schatz asked Powell in a January letter signed by 19 other senators about the risks that climate change posed to American financial institutions, and how the central bank was assessing that risk.

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In response, Powell wrote that the Federal Reserve viewed climate risks through the lens of potential "shocks to the system" in the form of severe weather events, rather than as a systemic vulnerability. Powell had previously compared climate change to the risks posed by the potential failure of information technology.

"Some potential risks are difficult to quantify and especially if they materialize over such a long horizon that methods beyond near-term analysis and monitoring are appropriate," he wrote. "Accordingly, we rely on ongoing research by academics, our staff, and other experts to improve our understanding and measurement of such longer-run or difficult to quantify risks."

Researchers and central banks around the world are increasingly pushing for greater consideration of climate risks in the supervision of financial institutions and the formulation of monetary policy.

A group of more than 30 central banks from around the world, including the European Central Bank and the People's Bank of China, have joined the Network for Greening the Financial System, which launched in 2017 during the One Planet Summit in Paris.

In March, Glenn Rudebusch, a senior policy advisor for the San Francisco Fed, wrote that the "even long-term risks can have near-term consequences as investors reprice assets for a low-carbon future."

Rudebusch wrote that financial firms with limited carbon emissions could still face substantial credit risk exposure "through loans to affected businesses or mortgages on coastal real estate."

"If such exposures were broadly correlated across regions or industries, the resulting climate-based risk could threaten the stability of the financial system as a whole and be of macroprudential concern," he wrote.

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Powell wrote the Fed is taking steps to ensure that the nation's financial infrastructure will withstand severe weather events.

The 12 regional reserve banks that operate under the Fed's supervision are prepared to meet increased demand for cash related to disruptive weather, he wrote.

And, according to the letter, the central bank works to make sure that financial institutions that "play significant roles in critical financial markets maintain sound practices to ensure that they can recover and resume their activities" following a natural disaster.

But that response did not satisfy Schatz. On Tuesday, the Hawaii lawmaker wrote that Powell's "answers were garbage" and suggested the central bank was ignoring "a climate financial bubble."

"This is in direct contrast to almost every other industrialized country and their regulatory agencies," he wrote. "Whether they are run by right wing or left wing governments, everyone else is taking financial risk related to climate change seriously. Except in America."