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The Fed is set to take on a new challenge: Climate change

The Fed is set to take on a new challenge: Climate change

The Federal Reserve is going green, and that could mean a substantial change for the way financial institutions have to prepare for the unexpected.

In recent days, several central bank officials have spoken about the importance of taking climate change into effect when considering dangers posed to the system. Along with that, the Fed’s financial stability report, which usually talks about how economic and market forces could impact banks, insurance companies and other firms, mentioned climate for the first time.

While none of the talk addressed anything the Fed might do specifically from a regulatory standpoint, the emphasis was clear on how important the issue has become.

“Federal Reserve supervisors expect banks to have systems in place that appropriately identify, measure, control, and monitor all of their material risks, which for many banks are likely to extend to climate risks,” the financial stability report said.

Fed Governor Lael Brainard first brought up the need to address the issue just over a year ago.

In a statement accompanying the report, she noted that “climate change poses important risks to financial stability.” The report cites price instability that could come from climate-driven weather events like tornadoes and floods that cause households and businesses to have too much debt relative to assets, forcing panic selling.
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