WASHINGTON — Federal Reserve Chair Jerome Powell on Wednesday defended the Fed’s increasing scrutiny of the threat that climate change could pose to the health of the nation’s banks, after some Republican members of Congress had complained that by doing so the Fed was overstepping its mandate.
Over the past year, the Fed has taken steps to incorporate the risks from climate change into its oversight of the financial system. A key part of the Fed’s mandate, in addition to setting short-term interest rates to either stimulate or slow the economy, is regulating banks to guard against excessive risk-taking.
Last year, the central bank joined an international organization of central banks and regulators to coordinate on managing the risks that climate change poses to the financial industry. In a report last year on financial stability, the Fed for the first time cited such risks and established an internal climate committee.
“The reason we’re focused on climate change is that our job is to make sure that financial institutions, banks, particularly the largest ones, understand and are able to manage the significant risks that they take,” Powell said in an interview with the Economic Club of Washington. “We see it only through the lens of that existing mandate.”
Climate risks include the potential for banks to hold too many mortgage loans for homes in coastal areas that are threatened by rising sea levels, or loans to oil and gas drillers that could fail if energy generation switches to renewable sources.
Last month, 12 Republican senators wrote a letter to Powell accusing the central bank of moving “beyond the scope of the Federal Reserve’s mission.”
“We question both the purpose and efficacy of climate-related banking regulation and scenario analysis, especially because the Federal Reserve lacks jurisdiction over and expertise in environmental matters,” the letter said.
The letter was signed by Sen. Pat Toomey, the senior Republican on the Banking Committee, and by Republican senators Richard Shelby of Alabama, Mike Crapo of Idaho and Tim Scott of South Carolina, among others.