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Fed’s Brainard says climate scenario analysis a key tool in measuring bank risks By Reuters

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© Reuters. FILEPHOTO: Lael brainard, Federal Reserve Board Governor, addresses Harvard University’s John F. Kennedy School of Government on March 1, 2017, in Cambridge, Massachusetts. REUTERS/Brian Snyder

By Pete Schroeder

WASHINGTON, (Reuters) – Lael Brainard, Governor of the Federal Reserve said on Thursday that the bank must continue to assess how banks may be affected by climate change. He stated such analyses will prove crucial in assessing risks.

Brainard stated in a prepared speech that regulators have to do “substantial” work closing gaps in data and creating new models to accurately gauge the risks of climate change for banks. Although the Fed must be modest about its initial analysis, this should not stop regulators developing these tools.

Fed officials previously mentioned that such an analysis which could measure banks’ performance in the face of climate change risk might be useful to ensure that the financial system can adapt to a changing environment. Brainard indicated that the Fed was “actively learning from” regulators in other nations who are more advanced in creating such tests.

Brainard acknowledged that there were inherent difficulties in modeling and predicating climate risks. This is different from the previous Fed stress test. She said that existing stress tests are used to measure the banks’ vulnerability to hypothetical recessions. They can also be built on historical data. However, there is no comparable test for climate risk.

“Climate scenario analysis has to be able to take into account plausible, but new combinations of risks associated with considerable uncertainty,” she stated.

Brainard noted that there are other new considerations. For example, the impact of climate change on every region is not similar and traditional hedge tools such as insurance might not be as efficient.

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