Financial Regulators confirm that Climate Risk Warrants Action
Washington, DC – U.S. Congressman Sean Casten (IL-06) questioned Vice Chairman of Supervision, Board of Governors of the Federal Reserve System Randal Quarles and Acting Comptroller of the Currency, Office of the Comptroller of the Currency Michael Hsu on what action is being taken to address climate risk within the financial system during today's House Financial Services Committee Hearing on Oversight of Prudential Regulators.
Responding to a comment made earlier in the hearing by House Republican Andy Barr asserting that the Fed doesn't have the authority to "regulate environmental policy", Casten began his questioning by pointing the absurdity of that statement, and clarified that the Federal Reserve examining climate-related financial risk does not imply the Federal Reserve is regulating environmental policy.
Casten said, "I want to put my friend at ease when he said that the Fed doesn't have the authority to regulate environmental policy. I just want to talk about the financial system. As you know the rest of the world is leading and we are now in a following mode and it's time for us to get back into a leading mode. "
Casten went on to push the regulators to commit to further action to address the threat climate risk poses to the financial system—asking what concrete steps are being taken to mitigate climate-related risk to the U.S. financial system and ensure global financial stability. In response, Vice Chairman Quarles affirmed that the Federal Reserve is working on a comprehensive framework. Acting Comptroller Hsu expressed in his opening remarks that he's asked OCC staff to explore joining the Network for Greening the Financial System (NGFS). In responding Rep. Casten's question Mr. Hsu further elaborated the importance of engaging with international players to learn from their experiences and lessons.
Click hereto watch Casten's questioning.
Find a full transcript of Casten's questioning below:
Sean Casten 0:00
Thank you Mr. Chairman and thank you to our panelists. I'd like to stay with you, Vice Chair Quarles and stay on the subject of climate. I'm delighted to hear your focus on the risk, analytical and data driven. I put my friend Mr. Barr at ease when he said that the Fed doesn't have the authority to regulate environmental policy. I just want to talk about numbers, and I just want to talk about the financial system. As you know the rest of the world is leading and we are now in a following mode, and it's time for us to get back into a leading mode. So I'd like to just understand a couple of issues to understand what you all are going to do analytically. We know from our Science Committee I serve on with Mr Laudermilk that we have significant sea level rise, measured in feet not inches, that is highly likely within the time horizon of current mortgages. As you do your analysis, can you commit to us that you will be factoring in what impact that will have on the banks on GSCs and the insurance industry?
Chair Quarles 1:03
So the answer is yes, because we have long taken into account in supervising institutions in particular geographic locations, the risks of those geographic locations. As we continue to get more data and to learn more about the evolution of the environment as additional risks become clear, we will ensure that institutions are including them in their risk management and that we include that in our supervision of their risk management,
Rep. Sean Casten 1:34
I just want to point out, and I understand we're all being cautious because these are uncertainties, there's a real gap when we sit on the Science Committee and I say what cities are you concerned about and they say the entire eastern seaboard. And then I moved to Financial Services and we say we're thinking about these changes. We have to grapple with that.
Second question, S&P announced in January that it was placing 13 major oil and gas companies on negative credit watch due to energy transition risks. Will your analysis consider the debt and equity risk if that goes away and what's going to happen to the holdings within the bank you regulate?
Chair Quarles 2:14
Well we're developing the framework currently to be comprehensive, but any placing of any institutions' exposures on credit losses, is and will be taken into account in supervision of institutions that are exposed to those firms.
Rep. Sean Casten 2:29
Okay one of the concerns I have coming from the energy industry is that there's some natural cyclicality in the energy industry. And you can kind of watch like clockwork that the holdings in the regulated banks when there's a negative cyclicality get moved into their non-bank holdings and all of a sudden the bank says "I've got an opportunity for you to invest in you know energy Special Projects fund five", and we all understand what they're doing, but that gets it out of some of the areas that you might have direct regulatory supervision. As you do this analysis, will you be looking to make sure that those assets that are encumbered as banks try to move risk into areas that may not be subject to Dodd Frank supervision or other regulatory regimes? And can you commit to making sure that we keep an eye on those non-bank actors as well to understand where money is moving throughout the entire economy?
Chair Quarles 3:19
The Federal Reserve as a holding company and umbrella supervisor does look at the overall organization and not simply, not only the depository institutions subsidiary. So, yes, when we take a look at the again at the capital position or the overall position of the firm we take into account the risk position of the firm we look at the overall firm.
Rep. Sean Casten 3:42
Okay well I'd welcome the chance to work with your office on that. We're spending a lot of time thinking about it and as I said at the start, I think we are a bit behind the eight ball.
Acting Comptroller Hsu, you mentioned in your opening comments that you, rejoining the network or joining the network for greening the financial system, can you just share with us a little bit of why that's so important and, and what kind of leadership you're seeing and an international framework that we need to come up to speed on.
Acting Comptroller Hsu 4:12
I think the primary purpose is to learn. That form was created in order to allow and facilitate Central Bank supervisors from around the world, and they've got a lot of members who come and take care of it. We're seeing here are some best practices, here's what we're dealing with. And the idea first, we don't want to reinvent the wheel. If someone else has come up with a good approach to these risks that we've been talking about, we want to leverage that as quickly as possible and kind of integrate that and apply it in a tailor fashion to our institutions which, which are gonna have to deal with.
Rep. Sean Casten 4:48
Well thank you and I will yield 11 seconds back to the chair. Appreciate your time. Thank you.
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