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Bill would require Federal Reserve to take action to identify and manage climate-related financial risks

(Washington, D.C.) – U.S. Senator Patty Murray (D-WA) joined Senator Brian Schatz (D-HI) and Congressman Sean Casten (D-IL) to reintroduce the Climate Change Financial Risk Act of 2021. The legislation will direct the Federal Reserve (“Fed”) to conduct stress tests on large financial institutions to measure their resilience to climate-related financial risks.

“The climate crisis is already here—we see it in rising sea levels and more and more extreme weather events every year—and the significant financial costs that come with them,” Senator Murray said. “We need to have contingencies ready to mitigate the financial damage of climate change to families in Washington state, and our country’s economy as a whole. By ensuring the U.S. financial system is better prepared to confront climate change, we’re protecting the pockets of Washington state families. I’m glad that President Biden and his administration are taking the climate crisis seriously, and this bill will ensure that the Federal Reserve follows suit.”

As the country faces the dire threat presented by the climate crisis, Senator Murray is committed to taking urgent action to protect current and future generations from the harmful effects of climate change. Earlier this year, Senator Murray led her colleagues in introducing the Clean School Bus Act, which would provide $1 billion for grants to help school districts across the country replace traditional school buses with electric ones. President Biden included key provisions of Murray’s bill in his American Jobs Plan, which Senator Murray supports, as well as other key provisions such as targeting 40% of the bill’s benefits of climate and clean infrastructure investments to disadvantaged communities, investing $100 billion to bolster the country’s electric grid and phase out fossil fuels and $174 billion in electric vehicles and electric vehicle infrastructure, and establishing a civilian climate corps. Senator Murray has also been a longtime champion of the Wild Olympics Wilderness & Wild and Scenic Rivers Act, which would permanently protect more than 126,500 acres of Olympic National Forest as wilderness and 19 rivers and their major tributaries, a total of 464 river miles, as Wild and Scenic Rivers.

Climate change is increasing the frequency and severity of extreme weather events like floods and wildfires. It is also changing long-term climate patterns in ways that will lower labor productivity, devalue and destroy assets, stress agricultural yields, and ultimately affect every sector of our economy. These impacts will pose risks for financial firms and the global financial system.

Financial institutions face the risk of direct losses from severe weather events and fundamental changes like drought and sea level rise—for example, lower property values from increased flooding. They also face risks from market instability, an erosion of investor confidence, and changes in carbon-intensive asset values resulting from government policies and consumer preferences. Unlike its counterparts in the United Kingdom, the Eurozone, and other jurisdictions, the Federal Reserve is not yet conducting climate scenario analysis as part of its supervisory regime.

The Climate Change Financial Risk Act 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.

With the input from the advisory group, the Fed will create three stress test scenarios: a 1.5 degree Celsius warming scenario; a 2 degree scenario; and a “business as usual” scenario, which assumes a higher level of warming if there are no climate policies in place. For each scenario, the Fed will quantify the ways in which climate-related physical and transition risks could disrupt the economy and global business operations. The Fed will conduct stress tests every two years on the same large financial institutions that are currently subject to Comprehensive Capital Analysis and Review (CCAR) stress tests—i.e., firms with more than $250 billion in total consolidated assets (and some with assets over $100 billion, if the Fed deems it necessary to promote financial stability).

The biennial tests will require each covered institution to create and update a qualitative remediation plan, which will describe how the institution plans to evolve its capital planning, balance sheet and off-balance sheet exposures, and other business operations to respond to the most recent test results. Fed objections to a remediation plan would limit the institution’s ability to proceed with capital distributions until it improves its plan. However, institutions would not have to increase their current capital based on the results of a climate stress test.

Based on the same scenarios used for the stress tests, the Fed will also partner with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to design a nonbinding exploratory survey, which will assess the ability of sub-systemic banks (those with more than $10 billion in assets) to withstand climate risks. The Fed will administer the survey every two years and report on the results in aggregate. Survey participants will remain anonymous in the report and will not face adverse consequences on the basis of their responses.

A summary of the bill is available HERE.

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