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The Federal Reserve Board says banks are likely to need regulatory instructions on managing climate risk.

The Federal Reserve Board’s top executive said that financial regulators will take new steps to manage climate-related risks as part of a broader effort to strengthen monitoring of the risks posed to the financial system in the coming years. He said he needed to instruct the country’s largest bank to take action.

Federal Governor Lael Brainard prepares central banks to step up their assessment of the heightened threats of climate-related events, such as natural disasters and wildfires that can have unforeseen shocks to the economy and markets. I explained in detail how it is done.

In a hypothetical statement at a Boston-sponsored meeting on banking supervision on Thursday, “Ultimately, large banking institutions will provide supervision guidance to properly measure, monitor and manage important climate-related risks. I hope it will be useful. “Federal Reserve Bank

Brainard’s remarks are noteworthy, as they are also considered potential candidates for the Fed’s Vice-Chairman of Banking Supervision. Randall Qualls, who is currently in that position, will expire next week. Brainard is also a potential candidate to chair the Federal Reserve Board when Jerome Powell’s term ends early next year.

“Climate change can have a profound effect on the level of economic activity over time, trend growth and variability,” Brenard said. The coronavirus pandemic “clearly reminds us that extreme events can occur with little warning and can cause serious losses and market turmoil,” she said.

Brainard said the Fed is currently looking at ways to incorporate so-called scenario analysis to explain both the physical risks of climate change and the costs associated with the transition to a low-carbon footprint economy. rice field. Both natural disasters or government policy measures to address climate change “may rapidly change perceptions of future risks and reveal new information about the value of assets,” she said. rice field.

Brainard identified the need for scenario analysis that models expected returns and losses for banks to distinguish risks both geographically and within different sectors of the economy. These assessments also need to explain the intensification of climate-related risks at the regional or sector level over time.

Not like Other central banks in the worldThe Fed faces a tricky balancing act of navigating its role in this issue as the US political system has not reached consensus on how and whether to deal with climate change.

Some progressive Democrats said they did not use the Fed’s oversight over banks to clearly influence the conditions under which certain industries could access credit, such as fossil fuel exploration and development. I blamed Mr. Powell. They want President Biden to replace Powell with a more climate-focused person, including potentially Democrat Brenard, when his term expires early next year.

Brainard expressed some impatience with the climate-related monetary policy situation At the Economics Conference Last week in Arlington, Virginia.

“It’s a region where the United States is lagging behind, and we need to catch up,” Brenard said.

Republicans warned the central bank not to step over its authority. For example, Republicans in the House of Representatives oppose the Securities and Exchange Commission’s proposal to develop climate risk disclosure standards for listed companies.

Powell, a trustee at The Nature Conservancy, a public charity focused on nature maintenance before joining the Fed’s board 10 years ago, said climate change would hit the economy and the global market earlier this year. He warned that it would pose a serious challenge. He acknowledged that the Federal Reserve should play a role in monitoring and addressing potential risks, but said the implementation of a comprehensive national climate policy was “not a matter of the Federal Reserve.”

Last year, the Federal Reserve Board joined a global group of financial regulators and central banks focused on sharing climate-related risk management best practices. Brainard emphasized the uncertainties and limitations around what the central bank might first find. “We must be humble about what first-generation climate scenario analysis can bring,” she said Thursday.

The Federal Reserve has established two different internal committees to monitor the potential threat posed by climate-related shocks to the economy. One is focused on improving how banking regulators deal with risks to the country’s largest financial institutions, and the other is broader as part of the Fed’s role in overseeing these companies. We are dedicated to investigating threats to the financial system.

Write to Nick Timiraos nick.timiraos@wsj.com

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The Federal Reserve Board says banks are likely to need regulatory instructions on managing climate risk.

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