Brainard indicates guidance ahead for measuring, monitoring, managing climate risks for large banks

Supervisory guidance for large banking institutions from the Federal Reserve in measuring, monitoring and managing climate-related risks is anticipated from at least one of the agency’s board governors, she told a group Thursday.

In remarks via webcast to the 2021 Federal Reserve Stress Testing Research Conference in Boston, Fed Gov. Lael Brainard also said her agency’s Financial Stability Climate Committee is assessing climate-related risks to financial stability from a macroprudential perspective—that is, one that considers the potential for complex interactions across the financial system.

“Going forward, it will be important to improve our understanding of climate-related financial risks and vulnerabilities,” she said.

Much of Brainard’s remarks focused on “scenario analysis” of the impact of climate change on banks, which she indicated would be assisted by supervisory guidance and assessments of climate-related risks.

“As part of our prudential and financial stability responsibilities, we are developing scenario analysis to model the possible financial risks associated with climate change and assess the resilience of individual financial institutions and the financial system to these risks,” Brainard said.

She asserted that scenario analysis is a “useful tool” in assessing the links between climate-related risks and economic outcomes. She said that is because the analysis requires assessing the implications for financial stability and individual financial institutions in a systematic way.

“The interactions across institutions and market segments must be traced out, and missing data must be identified, acquired, and analyzed, leading to a clearer picture of the transmission of risks,” she said. “Scenario analysis should ultimately facilitate estimating the possible effects on individual financial institutions as well as on financial markets more broadly. By systematically modeling the effects of climate-related risks across the financial system, scenario analysis can help inform risk management at the level of individual financial institutions and more broadly.”

She asserted that, “even with a rudimentary first attempt,” climate scenario analysis would help with risk identification and “suggest useful lessons to inform subsequent improvements in modeling, data, and financial disclosures.”

“Although we should be humble about what the first generation of climate scenario analysis is likely to deliver, the challenges we face should not deter us from building the foundations now,” Brainard said.

She said the Fed, to close a “data gap,” is already gathering “key data resources,” such as acquiring external data and making existing publicly available climate data “more useful for modeling and research capabilities.”

Gov. Lael Brainard: Building Climate Scenario Analysis on the Foundations of Economic Research