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Fed intensifies climate risk focus with new panel, scenario analysis

(Reuters) -The Federal Reserve is intensifying its efforts to understand and manage global warming threats to the financial system, establishing a panel focused on financial stability risks and looking into the possibility of climate stress tests for banks.

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The moves at the U.S. central bank, announced on Tuesday, are broadly in line with the Biden administration’s pledge to tackle climate change, although they date back to at least 2019 when the San Francisco Fed held the Fed’s first public conference on the subject.

They are, however, unpopular with Republican lawmakers, who see them as overstepping what they feel should be a narrow Fed focus on interest rates, inflation and employment.

“Climate change is an emerging risk,” Fed Chair Jerome Powell told the U.S. House of Representatives Financial Services Committee, defending the central bank’s engagement in the issues. “We are looking at it carefully; we actually are just in the very early stages of considering stress scenarios.”

Separately, Fed Governor Lael Brainard announced the Fed’s plan to establish a financial stability climate committee.

The new panel will work on identifying and finding ways to mitigate climate risks to the financial system as a whole, she said, and will complement the Fed’s recently established supervision climate committee, which is focused on addressing risks at individual banks.

The Fed’s two panels form the core “pillars” to a new framework for addressing the economic and financial consequences of climate change, Brainard told the Ceres 2021 climate change conference, adding that those risks included the potential for shocks to the financial system that could ripple out to harm households, businesses and communities.

“It is increasingly clear that climate change could have important implications for the Federal Reserve in carrying out its responsibilities assigned by the Congress,” Brainard said.

The Fed has been building climate risk into its writ more publicly in recent months, including it for the first time in two regulatory reports issued in 2020, and making it part of its broader push to modernize its approach to bolstering lending to low-income communities.

The Fed also joined the Network of Central Banks and Supervisors for Greening the Financial System late last year.

Other U.S. financial regulatory agencies are also diving in with their own focus on climate.

Republicans in the House and the Senate recently sent letters to Powell expressing concern that the Fed would use its bank supervision powers to further an environmental agenda, and raising objections to the use of climate scenario analysis that they suggested could weaken the financial system.

Scenario analysis, Brainard said on Tuesday, could be a “helpful tool” for the Fed, providing “a structured way of uncovering the parts of the financial system where physical, transition, and other risks may have outsized effects through potential spillovers.”

Reporting by Ann SaphirEditing by Paul Simao

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