Fed Governor Waller casts doubt on need to conduct climate change tests for banks - CNBC
Fed Governor Waller doubts need for climate-change tests on banks
- Fed Governor Christopher Waller on Thursday cast doubt on the need for special focus on how banks are preparing for climate change risks.
- "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.
Federal Reserve Governor Christopher Waller on Thursday cast doubt on the need for special focus on how banks are preparing for climate change risks.
While acknowledging the risks that climate change poses, he said catastrophic events like hurricanes and floods don't generally reverberate across the U.S. economy. Thus, he said that conducting special tests for how banks are preparing for such events probably shouldn't fall under the Fed's purview.
"I don't see a need for special treatment for climate-related risks in our financial stability monitoring and policies," Waller said in the prepared remarks for a speech in Madrid. "Based on what I've seen so far, I believe that placing an outsized focus on climate-related risks is not needed, and the Federal Reserve should focus on more near-term and material risks in keeping with our mandate."
Nevertheless, the Fed already has directed the nation's six largest banks to show plans for how they would respond to climate-related events.
While separate from the stress tests the Fed conducts on systemically important institutions, the exercises bear similarities. The stress tests focus on how banks would respond to financial and economic crises.
"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. "There is no need for us to focus on one set of risks in a way that crowds out our focus on others."
He noted that events such as forest fires and other climate-connected disasters are "devastating to local communities. But they are not material enough to pose an outsized risk to the overall U.S. economy."
Waller added that households and businesses, including banks, have shown the ability to adapt to changes. Bank performance, he said, is generally not affected by disasters in their regions.
Fed officials for the past three years or so have been debating how much emphasis should be placed on climate risks. A financial stability report in 2020 first addressed the topic.
Related Knowledge Center: Climate economics
Climate change is now a driver of the world’s economy. The impact is profound:
- Catastrophic weather events — hurricanes, floods, droughts, high temperatures — are more frequent and more extreme. The cost can be measured in both the initial damage caused and the longer-term impact on the economy.
- Vulnerable communities are increasing climate-related investments, hardening infrastructure and taking other protective measures.
- Investment in carbon capture and storage technologies is increasingly rapidly.
- Governments are making investments and crafting regulations to reduce emissions of carbon dioxide and other greenhouse gases.
On top of all of this is the cost of uncertainty. As the Fourth National Climate Assessment, released in 2018 by the U.S. Global Change Research Program, says, “The assumption that current and future climate conditions will resemble the recent past is no longer valid.”