FSOC Climate Risk Report Meeting

Financial Stability Oversight Council (FSOC)

Open Meeting
Thursday, October 21, 2021

Climate Related Risk Report Presentation
Eric Juzenas, Counselor, Domestic Finance, U.S. Department of Treasury
Juzenas outlined how FSOC’s climate related risk report recommends a series of steps including: identifying the effects of climate change on the financial system, quantifying climate change’s effect on financial activity, evaluating the link between the economic impact of climate change and the financial system, and the stability implications of climate change financial risk. He explained that the report also discusses physical and transitional risks and added that agencies have already taken steps to start addressing climate change financial risk. He stated that the Council will form a new staff-level committee on climate financial risk and an advisory committee soliciting input from third parties. He also said that FSOC recommends member agencies to improve public communication on climate financial risk and identify and ensure that they have access to data on climate financial risk. Juzenas explained that the report describes how public climate related disclosure fosters increased transparency and facilitates market efficiency and how the Council recommends that members improve current disclosure policies. He also explained the Council’s recommendation for issuers of requirements for disclosures to consider whether disclosure of greenhouse gas emissions would be appropriate. He further stated that members should use scenario analysis and common scenarios to assess risk. He added that the report recommends members to review supervisory and regulatory tools to determine whether updated regulations or guidance is needed to clarify expectations. Juzenas also said the report emphasizes that the effects of climate change disproportionately impact disadvantaged communities and concluded that semi-annual progress updates by the climate related financial risk community will be given to the council.

Council Comments
Janet Yellen, Secretary, U.S. Department of Treasury
Secretary Yellen gave remarks following the presentation of the report and said the report is a critical step forward in addressing climate change and will by no means be the end of the Council’s work in this space. She said as climate change intensifies with more frequent climate related events, triggered declines in asset values and economic activity could cascade through the financial system if risks are not properly measured and mitigated. Yellen noted that the economic adjustments required are large and need to begin soon to facilitate the transition to a net zero economy and that the longer we wait, the greater the risk. She emphasized that we cannot confuse an emerging risk with a hypothetical one. Yellen added that just during the drafting of this report, many extreme weather events occurred like hurricane Ida and wildfires in the Northwest Pacific. She concluded that this report provides recommendations on how council member agencies can more effectively respond to fiscal and transitional risks to a lower carbon economy and contains over 30 specific recommendations. Yellen highlighted ideas like scenario analysis, enhanced climate disclosures, enhanced climate-related data for risk management, building up capacity and resources, and establishing a climate-related financial risk committee within FSOC.

Jerome Powell, Chairman, Federal Reserve Board of Governors
Powell explained how the public expects FSOC to address climate change financial risk and added his support for FSOC’s report. He explained how the report emphasizes the need for comparable disclosures and cited scenario analysis. Powell added that the Fed is also developing scenario analysis and will continue to work together with its domestic and international counterparts to sharpen the Fed’s response to climate change financial risk.

Michael Hsu, Acting Comptroller, Office of the Comptroller of the Currency (OCC)
Hsu said he supports the report and recommendations and that the OCC is very focused on fostering sound risk management. He added that they are collaborating with peers by participating in international forums like the Basel Committee. Hsu mentioned FSOC report’s recommendation for developing high level climate risk management supervisory expectations for large banks and hopes to issue framework guidance in the near future. Hsu concluded that he greatly appreciates the report’s focus on disadvantaged, vulnerable communities.

Jelena McWilliams, Chairwoman, Federal Deposit Insurance Corporation (FDIC)
McWilliams explained how the FDIC has long required its regulated institutions to consider financial risk and how banks have adapted their underwriting practices to financial risk. She added that the FDIC has undertaken numerous steps to better understand and address climate related financial issues. She stated that FSOC has not had an adequate opportunity to conduct a sufficient analysis to address the macro-economic consequences of climate financial risk issues and stated that she will abstain from voting on the report because she believes the report is premised on a number on conclusions that warrant further examination.

Gary Gensler, Chairman, Securities and Exchange Commission (SEC)
Chair Gensler said many staff collaborated on this report, called it thoughtful and thought provoking, and encourages the public to take a look at the report closely. Gensler also mentioned two ongoing staff reports at the SEC, one about public companies and disclosures, and the other looking into “green” investment funds.

Sandra Thompson, Acting Director, Federal Housing Financing Agency (FHFA)
Thompson explained that the FHFA intends to ensure that its regulated entities remain safe and sound while addressing climate financial risk and recognizes the need to coordinate to address the needs of underserved and vulnerable communities. She added that the agency will ensure that all participants in the housing finance system have the information needed to make informed decisions and work to build a stronger, more climate resilient housing finance system.

Rohit Chopra, Director, Consumer Financial Protection Bureau (CFPB)
Chopra discussed many intensifying catastrophic events around the world. He said ensuring housing security is a top priority for the CFPB and looks forward to studying the report.

Rostin Behnam, Chairman, Commodities and Futures Trading Commission (CFTC)
Behnam explained that the CFTC is a price discovery and risk management agency that seeks to have an orderly transition to address the climate events we are facing.

Todd Harper, Chairman, National Credit Union Administration (NCUA)
Harper said the NCUA has established a climate financial risk working group to develop in-house expertise on climate risk and explore implications on credit unions. He said he supports the final report but tremendous work remains to be done in the industry.

Thomas Workman, Independent Member with Insurance Expertise, FSOC
Workman praised the report for focusing on more targeted information relating to financial risk and added that he looks forward to seeing the fruits of the report and information gathering process.

Steven Seitz, Director, Federal Insurance Office, U.S. Department of the Treasury
Seitz said the report highlights the role of the insurance sector in this area and that the federal insurance office requested information from public input on climate related financial risk which highlighted climate related priorities and issues or gaps in supervision.

Dino Falaschetti, Director, Office of Financial Research, U.S. Department of Treasury (OFR)
Falaschetti explained the need to further understanding how climate change translates into deeper, broader risks. He discussed OFR’s steps to address the President’s Executive Order on climate change risk including identifying data gaps in climate change financial stability and continuing information analysis and exchange with FSOC colleagues.

Commissioner Charles Cooper, Texas Department of Banking
Commissioner Cooper said it is very important for the banking industry to proactively address climate risk, as well as for bank supervisors to act in a unified manner to ensure our institutions are appropriately managing risk. He also encouraged federal banking agencies to utilize the Federal Financial Institutions Examination Council (FFIEC) to ensure that supervisory expectations for climate related financial risks are consistent.

The resolution was approved by the Council with one abstention vote from Chair McWilliams.

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