New legislation being considered in the U.S. Senate would require the Federal Reserve to subject large financial institutions to stress tests to measure the banks’ resilience to climate-related financial risk.
The Climate Change Financial Risk Act of 2019 would require the Fed to establish an advisory group of climate scientists and climate economists to help develop climate change scenarios for the financial stress tests, Senator Kamala Harris, a sponsor of the bill, said in a statement. Other sponsors include Democrats Brian Schatz of Hawaii, Elizabeth Warren of Massachusetts, and Cory Booker of New Jersey.
Under the proposed legislation, the Fed would create three stress test scenarios under different warming levels, one that presumes 1.5 degrees Celsius of warming, one that presumes 2 degrees of warming, and a “business as usual” that assumes a higher level of warming based on current climate policies.
Stress tests would be conducted every two years on the large financial intuitions that are subject to Comprehensive Capital Analysis and Review stress tests. Those firms have more than $250 billion in total consolidated assets. The current stress tests don’t specifically address climate-change scenarios.
The Federal Reserve held its first-ever conference on climate change and economics earlier this month. It said it may include climate risk in its financial-stability assessments and even in determining monetary policy.
“There is no dispute we are facing a climate crisis and that it will impact every aspect of our society, from the quality of our air to the stability of our financial system,” Harris said in a statement. “It is vital that we assess the financial risks of climate change so that we can protect the financial health of future generations.”
The Commodities Futures Trading Commission also has a special committee that looks at climate risks.
Financial regulators in the United Kingdom and the Netherlands recently conducted stress tests of climate risks. Norway’s central bank has said climate risks “must be integrated in the risk assessment and hence in the overall assessment of the capitalization and funding of financial institutions.”