Yahoo Finance Big banks complete climate analysis for Fed while Powell tries to avoid becoming climate policymaker
The Federal Reserve disclosed results from an assessment of how big US banks would be impacted by climate change, an exercise that created new political tensions for the central bank.
JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS), and Morgan Stanley (MS) found that 20%-50% of their commercial and residential real estate loans in the Northeast would be impacted by the most severe climate shock— defined as having no insurance coverage for a once-in-200-year event.
The impact would be a change in the estimated probability of default on those loans.
The banks were tasked with determining how heat waves, wildfires, higher average temperatures, a hurricane in the Northeast, and another hazard of their choosing would affect their loan portfolios.
But they had a difficult time modeling climate risks to assess the impact on those portfolios, noting significant challenges gathering data and measuring climate-related risks.
The goal was for the Fed to better understand banks' risk-management approaches to this issue so it can manage the risks climate poses to the wider financial system.
The climate analysis was exploratory and did not come with any penalties for banks, unlike a separate annual stress test run by the Fed designed to determine whether banks can withstand severe economic shocks.
Yet the test itself created new political complications for the central bank and Chairman Jay Powell, who has gone out of his way in public speeches to make it clear the Fed would avoid making climate policy.
"Policies to address climate change are the business of elected officials and those agencies that they have charged with this responsibility," he said during a speech last month at Stanford University. "The Fed has received no such charge."
"We are not, nor do we seek to be, climate policymakers," he said during his speech, pledging to avoid "mission creep."
That hasn’t stopped lawmakers and other policymakers from criticizing Powell on this subject.
His remarks on climate came roughly two weeks after Senators Elizabeth Warren and Sheldon Whitehouse sent a letter to Powell arguing the Fed’s high interest rates were delaying clean energy developments.
Sen. Whitehouse told Yahoo Finance last month that other central banks around the world closely consider climate change because "if left unchecked climate change will pose 'systemic risks' to our financial system and the broader economy."
And Republicans have also repeatedly come down on Powell for considering rules that would test banks' ability to withstand climate-related scenarios, arguing it falls out of the scope of the Fed's authority.
Not everyone within the Fed agrees with the approach, either.
Last May, Fed Governor Chris Waller said he doesn’t believe climate change poses a serious risk to the US financial system even as the central bank tested the resilience of banks under different climate scenarios.
"Climate change is real, but I do not believe it poses a serious risk to the safety and soundness of large banks or the financial stability of the United States," Waller said in a speech in Madrid, Spain.
"I don't see a need for special treatment for climate-related risks in our financial stability monitoring and policies," he added.
But Powell maintains that the central bank has a narrow role that relates to supervising banks.
"The public will expect that the institutions we regulate and supervise will understand and be able to manage the material risks that they face, which, over time, are likely to include climate-related financial risks," Powell said on April 3.
"We will remain alert to the risk that there will be pressure to expand that role over time."
Banks used different approaches to develop the physical and transition risk scenarios required by the Fed and to translate these scenarios into climate-adjusted credit risk parameters.
They also noted the need to monitor changes across the insurance industry, including changes in insurance costs over time and the impacts of those changes on consumers and businesses in specific markets and segments.
Banks' estimates of climate-adjusted credit risk parameters, such as probability of default, showed significant differences in impact across sectors, regions, and counterparties.
The exercise was exploratory in nature and does not have capital consequences.
Drawing on lessons learned from the exercise, the Fed said it will continue to engage with participating banks regarding their capacity to measure and manage climate-related financial risks.
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