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Fed's Waller: Climate change not a 'serious risk' to US financial system

Federal Reserve Governor Chris Waller said Thursday that he doesn’t believe climate change poses a serious risk to the US financial system even as the central bank tests the resilience of banks under different climate scenarios.

“Climate change is real, but I do not believe it poses a serious risk to the safety and soundness of large banks or the financial stability of the United States,” Waller said in a speech in Madrid, Spain. “I don't see a need for special treatment for climate-related risks in our financial stability monitoring and policies,” he added.

The comments come as the Fed seeks to understand banks' risk-management practices around climate change and improve the ability of banks and regulators to measure and manage any of those risks to the financial system. This effort is separate from the Fed’s annual bank stress tests.

Six of the largest US banks — Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS) and Wells Fargo (WFC) — are being asked to assess the impact of everything from hurricanes and wildfires to heatwaves and higher average temperatures on residential and commercial real estate loan portfolios over the next year. The Fed calls these "physical risk scenarios."

Board of Governors of the Federal Reserve member Chris Waller, speaks during a conversations with leaders from organizations that include nonprofits, small businesses, manufacturing, supply chain management, the hospitality industry, and the housing and education sectors at the Federal Reserve building, Friday, Sept. 23, 2022, in Washington. (AP Photo/Manuel Balce Ceneta)

The Fed is also asking banks to evaluate the impact of stresses from the transitioning to a lower carbon economy on corporate and commercial real estate loan portfolios over a 10-year horizon.

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Waller said Thursday that he does think it’s important to continue doing academic research regarding the role that climate plays in economic outcomes. But he said he doesn't believe risks posed by climate change merit special treatment from the Fed.

Falling property values tied to physical climate risks like hurricanes and fires could result in losses for banks, he said, but "there is a growing body of literature that suggests economic agents are already adjusting behavior to account for risks associated with climate change."

Waller said the Fed already tests for severe declines in real estate values in its annual stress tests.

In last year's stress test, which envisioned a drop of more than 25% in real estate values, the largest banks were able to absorb nearly $100 billion in losses on loans collateralized by real estate, in addition to another half a trillion dollars of losses on other positions, says Waller.

“Based on what I've seen so far, I believe that placing an outsized focus on climate-related risks is not needed, and the Federal Reserve should focus on more near-term and material risks in keeping with our mandate."

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