Brainard Discusses Implications of Climate Change on Financial Stability

In remarks at a Federal Reserve Bank of San Francisco event today, Fed Governor Lael Brainard discussed the potential implications that climate change could have for financial stability, and the importance of properly pricing in climate change-related risk. “For example, if prices of properties do not accurately reflect climate-related risks, a sudden correction could result in losses to financial institutions, which could in turn reduce lending in the economy,” Brainard warned. “The associated declines in wealth could amplify the effects on economic activity, which could have further knock-on effects in financial markets.”

The Fed “expect[s]banks to have systems in place that appropriately identify, measure, control and monitor all of their material risks,” Brainard said, including those associated with climate change. Such risks could include severe weather events and other natural disasters, along with transition risks that could arise as the nation moves to a lower-carbon economy. She added that many companies are already voluntarily assessing and reporting climate-related exposures under the guidelines issued by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosure.

Brainard also noted that as changing climate patterns cause more frequent and severe weather events, the agencies are working to clarify that disaster recovery work in low-to-moderate-income communities are eligible for credit under the Community Reinvestment Act. A recent research report by the San Francisco Fed highlighted that LMI communities stand to be significantly affected by climate change.