WASHINGTON, Oct 7 (Reuters) – Federal Reserve Governor Lael Brainard said on Thursday the central bank could move forward with efforts to assess how banks could be hit by climate change, saying such analysis will be a key tool in measuring risks.
In a prepared remarks, Brainard stressed that regulators face “substantial work” to close data gaps and build new models to properly measure the risks banks face from climate change.
While the Fed should be “humble” about any initial analysis, that should not deter regulators from developing such tools.
Fed officials had previously suggested that such analyses, which would assess banks’ performance against hypothetical risks associated with climate change, could be a useful tool to ensure that the financial system is well-positioned to navigate climate change.
Brainard said the Fed is “actively learning” from regulators in other countries that are further along in developing such tests.
At the same time, Brainard noted that there are inherent challenges in modeling and predicting climate risks, which are different from the previous solvency tests the Fed developed.
Existing solvency tests measure banks’ performance against hypothetical recessions that may be based on historical data, but nothing similar exists for climate risks, she said.
“Climate scenario analysis faces the challenge of having to consider plausible but novel combinations of risks that are associated with substantial uncertainty,” she said.
Brainard also highlighted other new considerations, including that the impact of climate change will not affect all areas of the country similarly and that traditional bank hedging tools, such as insurance, may not be as effective.
(Reporting by Pete Schroeder; Edited in Spanish by Ricardo Figueroa)