Fed Governor Waller doubts the necessity for local weather testing for banks

Federal Reserve Governor Christopher Waller during a Fed Listens event in Washington, DC, U.S., on Friday, September 23, 2022.

Al Drago | Bloomberg | Getty Images

Federal Reserve Governor Christopher Waller on Thursday expressed doubts about the need to put a special focus on how banks are preparing for the risks of climate change.

While acknowledging the risks posed by climate change, he said catastrophic events such as hurricanes and floods generally have no impact on the US economy. As such, he said conducting special tests to prepare banks for such events probably shouldn’t be the Fed’s purview.

“I see no need for special treatment of climate-related risks in our financial stability surveillance and policies,” Waller said in the prepared remarks for a speech in Madrid. “Based on what I’ve seen so far, I believe there is no need to place an undue focus on climate-related risks and that the Federal Reserve should focus on shorter-term and more material risks, consistent with our mandate.”

Still, the Fed has already instructed the country’s six largest banks to come up with plans on how they would respond to climate-related events.

While the exercises differ from the stress tests that the Fed conducts on systemically important institutions, they share similarities. The stress tests are about how banks would react to financial and economic crises.

“Climate change is real, but I don’t think it poses a serious risk to the safety and soundness of large banks or to the financial stability of the United States,” Waller said. “There is no need for us to focus on one type of risk that shifts our focus to others.”

He noted that events such as wildfires and other climate-related disasters “have devastating consequences for local populations. But they are not significant enough to pose an outsized risk to the US economy as a whole.”

Waller added that households and businesses, including banks, have demonstrated the ability to adapt to change. Banks’ performance is generally not affected by disasters in their regions, he said.

Fed officials have been debating how much emphasis should be placed on climate risks for about three years. A 2020 Financial Stability Report addressed the issue for the first time.

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