Senator Warren at Banking and Housing Hearing: Federal Reserve Must Fulfill Mandate to Ensure Safety of Too-Big-To-Fail Banks By Addressing the Risks Climate Change Poses to the Economy
Washington, DC - In a Senate Banking, Housing, and Urban Affairs Committee hearing today, United States Senator Elizabeth Warren (D-Mass.) highlighted the risks climate change poses to the economy and why the Federal Reserve and other regulators have a clear role in addressing these risks.
Because the Fed's mandate includes the safety of the too-big-to-fail banks, it is within the Fed's responsibility to deal with climate risk. By ignoring climate risk, the Fed and the other banking agencies are allowing politics rather than science to determine their course of action.
When Senator Warren asked if the Federal Reserve would be stepping outside its mandate or expanding its mission if it treated climate change the same way it treats other risks to the financial system, Gregory Gelzinis, Associate Director for Economic Policy at the Center for American Progress, affirmed that the Fed is within its mandate.
In response to Senator Warren's question on whether voluntary, self-regulation from big banks was sufficient to protect our financial system from climate risks, Mr. Gelzinis said "financial firms simply don't have the incentive to self-insure against these risks" and that "it's so vital for financial regulators to step in here and ensure the financial system is resilient."
Senator Warren's bill, the Climate Risk Disclosure Act, would require public companies to disclose critical information about their exposure to climate-related risks, help investors appropriately assess climate-related risks, accelerate the transition from fossil fuels to cleaner and more efficient energy sources, and reduce the risks of both environmental and financial catastrophe.
Transcript: 21st Century Economy: Protecting the
Financial System from Risks Associated with Climate Change
U.S. Senate Committee on Banking, Housing and Urban Affairs
Thursday, March 18, 2021
Senator Warren: Thank you, Mr. Chairman. And thank you for holding this hearing.
There's just no more room to dance around here. The evidence is undeniable that climate change threatens our economy. In a speech last month, Federal Reserve Governor Lael Brainard said that climate change "is already imposing substantial economic costs and is projected to have a profound effect on the economy at home and abroad."
So Mr. Gelzinis, how about if you connect the dots for us here. How does climate change put our financial system at risk?
Mr. Gelzinis: Yes. Thank you for the question, Senator. So, the physical effects of climate change could devalue a range of real assets and financial assets, including commercial and residential real estate, corporate bonds, and loans in certain sectors and geographies, municipal debt, commodities, and the derivatives tied to those instruments. And in addition, the inevitable low carbon transition could severely impair the value of financial instruments tied to carbon intensive sectors. And both of these types of risk have not only micro-credential implications for individual institutions but also pose a broader systemic threat just given the magnitude of the risk, the types of firms exposed, and the potential speed with which these losses can materialize.
Senator Warren: Right. Thank you. You know, these risks are real, and they affect the safety and the soundness of our financial system.
The Federal Reserve currently supervises some of the country's largest banks, including the banks that have been designated as too big to fail.
So, Mr. Gelzinis, if the health of one or more of these banks was at risk due to climate change, would the Federal Reserve be stepping outside its mandate or expanding its mission if it treated climate change the same way it treats other risks to the financial system?
Mr. Gelzinis: Absolutely not, Senator. They're within their mandate.
Senator Warren: Good. In other words, because the Fed's mandate includes the safety and soundness of the too-big-to-fail banks, it is within the Fed's responsibility to deal with climate risk. And by ignoring climate risk, the Fed and other banking agencies are allowing politics rather than science to determine the course of their actions. Is that a fair statement, Mr. Gelzinis?
Mr. Gelzinis: Yes. I mean normally these risks would violate the very responsibilities Congress handed down to the regulators.
Senator Warren: You know. And the biggest banks seem to realize what's happening, so they started to brag about how great they've been doing to solve this problem all on their own. Last month, for example, JP Morgan committed to achieving net zero carbon emissions by 2050.
Now, I appreciate that commitment. I do. But we also know that JP Morgan has financed close to $270 billion in fossil fuel projects since 2016 and has yet to announce any clear steps as to how it will wind down its significant participation in oil and gas drilling, in fracking and in other contributions to climate change.
So let me ask. Mr. Gelzinis, is voluntary, self-regulation from big banks sufficient to protect our financial system from climate risks?
Mr. Gelzinis: So, Senator, when you were warning about a potential housing crash in the early 2000s, financial regulators and Wall Street executives at the time hailed the merits of self-regulation and cast aside the warnings of "alarmists" and bank risk models, and decision-making was so advanced that crises, you know, really were a thing in the past. Then, the predictable catastrophe struck. And it wasn't those banks that caused the crash or regulators who were asleep at the wheel who suffered the consequences. It was communities across the country, and the government that picked up the tab. So financial firms simply don't have the incentive to self-insure against these risks, particularly against the worst outcomes. Partly because of their near-term focus on quarterly profits and partly because they don't bear the full costs of the risks that you know their activities are placing on the system. So I guess my fear is that, you know, similar to 2008, while the music is playing, financial firms will get up and dance. While they can still make short term profits, they'll continue to over engage in climate risky activities until catastrophe strikes yet again, and we relearn the painful lesson of self-regulation. So anyway, that's just why I think it's so vital for financial regulators to step in here and ensure the financial system is resilient.
Senator Warren: Right. And it is a powerful reminder of this analogy. You know, we need to take seriously the threat that climate change presents to our financial system - and that means using our regulatory tools to mitigate that threat. And every day that the Fed and other regulators refuse to do their jobs and ignore these risks, they put both our planet and our economy at risk.
Thank you. Thank you for being here. And thank you, Mr. Chairman.
Chairman Brown: Thank you, Senator Warren.
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