By Pete Schroeder

(Reuters) – Federal Reserve Chairman Jerome Powell stated Tuesday that the Fed was looking at tweaking a crucial leverage requirement. He also said climate stress scenario analysis is a “key instrument” to ensure top U.S. bank executives are fully aware of the financial consequences of climate change.

Powell stated that the Fed will continue to revise the “supplementary leverage ratio” (SLR), which is a significant constraint on bank activity. This was after banks claimed it discouraged them investing in U.S. Treasury markets.

His remarks were made during the Senate Banking Committee’s renomination hearing.

As the Fed reduces its economic stimulus, concerns about the SLR’s effect on bank activity grow. The Fed is looking to rethink its bond-buying practices and minimize the impact of the SLR on banks. The SLR directs banks not to invest in risky assets and encourages them to avoid traditional safe assets such as Treasuries.

Following the April 2020 Treasury market panic, the Fed was forced by the Treasury to temporarily lift the SLR. While the Fed did not allow that relief to expire for a year, they promised to revive the SLR and make any necessary improvements. Powell’s remarks clarify that the Fed is continuing to work on this issue.

Powell stated separately that climate-specific analysis for potential bank risks is a key tool for Fed Bank supervisors, as the central banking seeks to catch up to global counterparts in assessing climate risk.

Reuters reports that the Fed privately pressed banks about how they internalize gauging this risk. Banks believe that the Fed might launch a scenario analysis of climate risks by 2023.