The Federal Reserve has released an assessment of how major U.S. banks will be affected by climate change, creating new political tensions for the central bank.
JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS), and Morgan Stanley (MS) are commercial and residential Between 20% and 50% of real estate loans in the Northeast will be affected by the most severe climate shocks, defined as uninsured against once-in-200-year events such as hurricanes, floods, and wildfires. become.
The effect would be a change in the estimated probability of default on those loans.
The bank is tasked with determining how heat waves, wildfires, rising average temperatures, hurricanes in the Northeast, and other hazards selected by the bank will impact its residential and commercial real estate loan portfolios. I owed it.
However, it struggled to model climate risks to assess their impact on loan portfolios, pointing to data collection and measurement of climate-related risks as major challenges.
The Fed's goal was to better understand banks' risk management approaches to this issue and help them manage the risks that climate poses to the broader financial system.
The climate analysis was exploratory and did not impose penalties on banks, unlike another stress test the Fed conducts annually to determine whether banks can withstand severe economic shocks.
But the very act of testing is a new political challenge for the central bank and for its chairman, Jay Powell, who has gone out of his way to make it clear in public speeches that the Fed intends to avoid enacting climate action. caused physical complexity.
“Policies to address climate change are the job of elected officials and the agencies they hold accountable,” he said in a speech at Stanford University last month. “The Fed has not received any such accusations.”
“We are not climate change policymakers, nor do we intend to be,” he said in a speech, vowing to avoid “mission creep.”
That hasn't stopped lawmakers and other policymakers from criticizing Mr. Powell on the issue.
His climate comments came about two weeks after Sens. Elizabeth Warren and Sheldon Whitehouse sent a letter to Powell arguing that the Fed's high interest rates are slowing clean energy development. .
Sen. Whitehouse told Yahoo Finance last month that other central banks around the world should also carefully consider climate change because “if left unchecked, it poses 'systemic risks' to the financial system and the economy as a whole.” He said that
Republicans have also repeatedly criticized Powell for considering rules that would test banks' ability to withstand climate-related scenarios, arguing that it is outside the Fed's authority.
Not everyone at the Fed agrees with this approach, either.
Last May, Fed Director Chris Waller said that although the Fed had tested banks' resilience under a variety of climate scenarios, he did not believe climate change posed a serious risk to the U.S. financial system. He said he had not.
“Climate change is real, but I don't think it poses a serious risk to the safety and soundness of major banks or to the financial stability of the United States,” Waller said in a speech in Madrid, Spain.
“I don't think climate-related risks need special treatment in financial stability oversight or policy,” he added.
However, Chairman Powell maintains that the central bank's role is narrowly related to bank supervision.
“The public will expect that the institutions we regulate and supervise will be able to understand and manage the significant risks facing them,” Powell said on April 3. It is also likely to include financial risks.”
“We remain vigilant to the risk of pressure to expand our role over time.”
Banks used a variety of approaches to develop the physical and transition risk scenarios required by the Fed and to translate these scenarios into climate-adjusted credit risk parameters.
It also pointed to the need to monitor changes in the insurance industry as a whole, including changes in insurance costs over time and their impact on consumers and businesses in specific markets and segments.
Our estimates of climate-adjusted credit risk parameters, such as the probability of default, show that impacts vary widely by sector, region, and counterparty.
This exercise is exploratory in nature and has no capital implications.
Building on the lessons learned from the exercise, the Fed said it will continue to work with participating banks on their ability to measure and manage climate-related financial risks.
For the latest stock market news and in-depth analysis of price-moving events, click here.
Read the latest financial and business news from Yahoo Finance
