U.S. Fed should require banks to hold more cash for climate risks -think tank

WASHINGTON (Reuters) – The U.S. Federal Reserve should force banks to hold more cash to guard against potential losses due to climate change and possible steps to fight it, one of Washington’s top liberal think tanks said on Tuesday.

The plan here, published by the Center for American Progress and seen first by Reuters, is likely to inform a looming debate about exactly how far bank regulators should go in policing climate change as the Biden administration looks to tackle the issue on all fronts.

The paper argues that the Fed could move quickly to bolster banks’ capital cushions by establishing several new safeguards, including a new capital surcharge directly tied to how much pollution banks directly finance and heightened stress tests of big banks that incorporate climate risks.

Several of the changes are likely to be strongly opposed by Wall Street, and the Fed itself has taken a much more deliberate approach to climate than sought by progressive Democrats.

After lagging European counterparts on climate change under the Trump administration, the Fed has ramped up efforts in recent months, including devoting new staff specifically to exploring how climate change could impact the economy and the financial system.

“It is increasingly clear that climate change could have important implications for the Federal Reserve in carrying out its responsibilities,” said Fed Governor Lael Brainard in a March speech.

But the Fed has yet to adopt any new policies in response to climate change, a move the paper argues the regulator can ill afford.

“It would be quite easy for financial regulators to spend the next decade collecting more data, researching the issue…avoiding any actual steps to safeguard the financial system from these risks,” the paper stated. “The potential damage to the financial system is too great for regulators to wait.”

Instead, the group argues the Fed should move quickly, directing banks to hold more capital if they are exposed to more heavily polluting industries, arguing they could lose value as the world moves toward cleaner industries.

It adds the Fed should go farther with the largest banks, imposing a new capital surcharge directly tied to how much carbon they finance with their activities.

The report also called on the Fed to create a new exercise to test banks’ resilience to climate change over the long term, as well as integrate near-term climate risk into the existing annual stress test of bank finances.

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