The Fed is setting up bodies to examine the risks climate change poses to the financial system

The Federal Reserve has taken another step forward to ensure the financial system is protected from climate risks.

As the central bank turns its attention to the matter, the Fed has set up a Financial Stability Climate Committee and a Monitoring Climate Committee.

The panels will focus on “the potential for complex interactions across the financial system,” Fed Governor Lael Brainard said in a comment on Tuesday.

“Climate change and the transition to a sustainable economy also pose risks to the stability of the broader financial system. Therefore, a second core pillar of our framework is addressing the macro-financial risks of climate change,” added Brainard.

The Monitoring Climate Committee will focus on identifying risks and putting together a program to deal with them. The Financial Stability Climate Committee will deal with “macroprudential risks”, such as how the climate could pose systemic risks to the institutions overseen by the Fed.

While the takeover of the climate issue represents an expansion of the Fed’s role in overseeing banks and other financial institutions, officials have highlighted the potentially damaging effects of weather-related events on the system.

The central bank had begun asking large institutions to assess the potential impact of the climate and their readiness to cope with major events. Brainard was the first Fed official to speak on the issue, saying in late 2019 that she wanted her colleagues to think about how climate events could affect monetary policy.

“Financial market participants who fail to create a framework for assessing and managing climate-related risks could suffer significant losses in climate-sensitive assets caused by environmental shifts, a disorderly transition, or both,” said Brainard.

She added that “robust risk management” in a number of areas “can help keep the financial system resilient to climate-related risks and well positioned to support the transition to a sustainable economy.”

However, the movement to fight climate change has been pushed back by Republicans in Congress, who fear the Fed is going beyond its existing mandate.

At a hearing before the House Financial Services Committee Tuesday, Fed Chairman Jerome Powell wondered whether the central bank should be involved in the matter.

For his part, Powell has pointed out that climate change is not central to the Fed’s mission, but it is important.

“It is really very early to understand what all of this means. It can clearly have longer-term implications for our economy, our financial system, and the people we all serve,” said Powell. “It’s early days but we feel we have a responsibility to begin the process of understanding the risk.”

Powell said looking at the effects of climate change is part of making sure institutions are “resilient” to risk.

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