Fed’s Brainard Highlights Need to Understand, Manage Climate Change Risk

Speaking at a virtual industry event today, Federal Reserve Board Governor Lael Brainard highlighted the need to understand risks related to climate change, noting that it is “vitally important to strengthen the U.S. financial system” to meet this challenge.

Among other things, Brainard discussed the usefulness of climate scenario analyses to determine potential exposures to physical risks posed by climate change as well as transition risks of moving to a low-carbon economy. She noted that that “in part because of the different nature of climate-related risks relative to financial and economic downturns and the significantly longer planning horizon, this is distinct from established regulatory stress tests at banks, which are used to assess capital adequacy over a relatively short horizon.”

Brainard also said that banks have an important role to play in helping their customers and communities manage climate risk, particularly those in lower-income areas. “It is important to LMI communities and other underserved communities to be proactive in working to equitably mitigate the risks of climate change in advance,” she said. “Reflecting this, the Federal Reserve’s recent advance notice of proposed rulemaking on the CRA for the first time seeks feedback on providing CRA credit to encourage loans and investments that promote disaster preparedness and climate resilience.”