Steep challenges ahead in assessing impact of climate change on financial stability, OFR leader advises

Challenges are steep in assessing the impact of climate change on financial stability, particularly in integrating the mountain of financial and climate data to do so, the leader of Treasury’s top financial researcher said Friday.

In remarks before the 2022 Financial Stability Conference sponsored by the Cleveland Federal Reserve Bank in Cleveland, Ohio, Deputy Director for Operations of Treasury’s Office of Financial Research James Martin called climate change an increasing threat to financial stability. He said the ability assess the threat accurately is vital to mitigating it.

He called climate change risk complicated to define and “its potential risk to the financial system is challenging to model and forecast.”

Martin, who has been serving as the acting director of OFR since the resignation earlier this year of Dino Falaschetti in that role, said producing high-quality research on climate risk requires access to both climate and financial data, as well as the ability to integrate these data. “The integration can be complicated since it requires high-powered computing to ingest large, often complex data sets, as well as advanced statistical software to integrate these data,” Martin said. “While we’ve heard anecdotally this integration is a challenge for many researchers, we know firsthand that it is something financial regulators struggle with.”

He recounted that, earlier this year, his office and the Federal Reserve worked together to develop a prototype aimed at testing assessment of climate change impact on financial stability. Calling the pilot a success, he said the test included data, high-powered computing, and analytic tools. “This prototype environment provided select staff from the OFR and the Federal Reserve System access to climate data—such as figures on precipitation, and crop and atmospheric conditions—and also provided the tools needed to integrate this data with the Federal Reserve’s supervisory financial data,” he said.

He said his office is now moving the pilot into full production. “The new environment will support financial stability research by providing a platform to integrate and analyze a broad spectrum of data.  Looking ahead, we hope to expand this collaborative space for use by other FSOC regulators and to include additional data.”

In other comments about “frontier risks” (which includes climate change), Martin said a paper on central bank digital currency (CBDC) it expects to publish “in the coming months” (and which will complement a report OFR issued in July) found banking-sector stability may suffer when digital currencies are fully integrated into the financial system.

“To further our analysis, we are inventorying what commercial data is available on digital assets, and also engaging in discussions with federal and state financial regulators on where there are gaps in data on digital assets and how to best fill them,” Martin said.

Remarks: Opening remarks at day two of the 2022 Financial Stability Conference