An Important Step from the Fed on Climate Change

The Federal Reserve went from largely avoiding talk of climate change a couple of years ago to creating a Supervision Climate Committee that will work across the entire Federal Reserve System to consider climate risks for two of its main functions covering risk in the financial system. And, it chose a climate-aware senior official, Kevin Stiroh, as its first chair. This is a fantastic development, but the Fed also needs to do more with its other areas of responsibility, too.

Stiroh most recently held the very influential role of head of the Supervision Group at the New York Fed. In general, the Federal Reserve Board of Governors, which oversees the whole Federal Reserve System, places great credence in the insights of the various leaders of bank supervision at each of the 12 District Banks. Supervision is the regulatory function overseeing the soundness of financial institutions, so Stiroh already understands the dangers of climate change risk for financial institutions. In his previous role he was already vocal about the risks (link, link, link). He also co-chairs the international Task Force on Climate-related Financial Risks of the Basel Committee on Banking Supervision that is working on the issue at the international level. 

The creation of the climate committee focused on the financial sector will enable the Fed to graduate from research and speeches, like those linked above, to action, including how to manage the risks that climate change adds to an individual bank’s holdings and to the entire financial system. For the former, would an individual bank be able to remain in businesses if major hurricanes and wildfires harm the properties that hold mortgages on? For the latter, would the entire financial system be near collapse, like it was in 2008, if multiple strong storms hit the U.S.? Rather than waiting to see how the banks and the system handle the damages, the Fed is trying to understand the risks in advance and start making changes to the oversight of financial institutions to prevent catastrophic losses that could harm the entire financial system.

As I said late last year, the Fed has slowly been moving to prepare to integrate climate risk into its work. A few weeks later, it formally joined the Network for Greening the Financial System.

Forming the new committee and tapping Stiroh to lead it shows that the Fed is deeply considering how to integrate risk into its oversight of individual financial institutions and the financial system as a whole.

These steps are certainly in the right direction, but given the urgency of the climate crisis, the Fed also needs to start work on integrating climate change into all its areas of responsibility, including monetary policy, payments and consumer protection & community development. 

So, the Select Climate Committee is a fantastic  step. But we need all of the Fed’s powers and authorities to focus on the climate crisis if it is to meet its mandates and goals, including to “promote the effective operation of the U.S. economy and, more generally, the public interest.” Burning, flooded or areas without enough water can be horrible tragedies with tremendous human cost. That, to say the least, tends not be good for the economy or the public interest.