The presentations today provide important insights into the many important ways climate-related risks may affect our financial system and broader economy./2
"Similar to many areas around the country, we need not look far from here to see the potentially devastating effects of our changing climate. Less than a hundred miles from here, families have lost their homes and businesses, and entire communities have been devastated by the Kincade fire. Some have described
"So how does climate change fit into the work of the
"Climate change is projected to increase the frequency and intensity of extreme weather events, raise average temperatures, and cause sea levels to rise. Climate risks are projected to have profound effects on the
"Climate Change and Monetary Policy
"Let's start with monetary policy. Increasingly, it will be important for the
"For instance, monetary policymakers must accurately assess how disasters such as hurricanes, wildfires, and flooding affect labor markets, household and business spending, output, and prices./7 In deciding whether to alter monetary policy or, instead, to "look through" such shocks, policymakers need to assess the likely persistence of the effects and how widespread they are. Because there is considerable uncertainty about the persistence, breadth, and magnitude of climate-related shocks to the economy, it could be challenging to assess what adjustments to monetary policy are likely to be most effective at keeping the economy operating at potential with maximum employment and price stability./8 We need only look back to the oil price shocks of the 1970s and 1980s to see how difficult it was for monetary policymakers to assess accurately the likely persistence of the effects on inflation and output and the appropriate response.
"To the extent that climate change and the associated policy responses affect productivity and long-run economic growth, there may be implications for the long-run neutral level of the real interest rate, which is a key consideration in monetary policy. As the frequency of heat waves increases, research indicates there could be important effects on output and labor productivity./9 A shifting energy landscape, rising insurance premiums, and increasing spending on climate change adaptations--such as air conditioning and elevating homes out of floodplains--will have implications for economic activity and inflation.
"As policies are implemented to mitigate climate change, they will affect prices, productivity, employment, and output in ways that could have implications for monetary policy. Just on its own, the large amount of uncertainty regarding climate-related events and policies could hold back investment and economic activity./10
"Climate Change and Financial Stability
"Although there is substantial uncertainty surrounding how or when shifts in asset valuations might occur, we can begin to identify the factors that could propagate losses from natural disasters, energy disruptions, and sudden shifts in the value of climate-exposed properties. As was the case with mortgages before the financial crisis, correlated risks from these kinds of trends could have an effect that reaches beyond individual banks and borrowers to the broader financial system and economy. As with other financial stability vulnerabilities arising from macroeconomic risks, feedback loops could develop between the effects on the real economy and those on financial markets. For example, if prices of properties do not accurately reflect climate-related risks, a sudden correction could result in losses to financial institutions, which could in turn reduce lending in the economy. The associated declines in wealth could amplify the effects on economic activity, which could have further knock-on effects on financial markets. Beyond these physical risks, policymakers in some jurisdictions are assessing the resilience of the financial system to so-called transition risks: the risks associated with the transition to a policy framework that curtails emissions.
"The private sector is focused on climate risks. Private-sector businesses--including insurance companies, ratings agencies, data companies, and actuaries--are actively working to understand climate-related risks and make this information accessible to investors, policymakers, and financial institutions. Although this work is at an early stage, thousands of companies around the world are now reporting climate-related financial exposures to the
"An essential element of our bank supervision and regulation duties is assessing banks' risk-management systems. We expect banks to have systems in place that appropriately identify, measure, control, and monitor all of their material risks./13 These risks may include severe weather events that can disrupt standard clearing and settlement activity and increase the demand for cash. Banks also need to manage risks surrounding potential loan losses resulting from business interruptions and bankruptcies associated with natural disasters, including risks associated with loans to properties that are likely to become uninsurable or activities that are highly exposed to climate risks.
"Climate Change and Community Reinvestment
"Advancing Our Understanding
"The staff across the
"Work to understand the implications of climate-related risks for our economy and financial system is at an early stage. That is why we are particularly eager to learn from the work of our colleagues here and abroad. In that regard, the
"We also benefit from working with international peers who are taking the lead on understanding the effects of climate-related risks on their financial systems. We are participating in climate-related discussions at the FSB and other standard-setting bodies, and we will continue to support the work of the FSB's TCFD in order to improve standardization of financial disclosures related to climate change. Along with other officials with financial stability responsibilities, I have been following the
"We also have a lot to learn from the broader research community about the economic and financial effects of climate change. As we have seen today, researchers are making progress on addressing questions regarding how climate change relates to labor markets, trade policy, and monetary policy. By participating more actively in climate-related research and practice, the
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1/ I am grateful to
3/ For example, see
5/ See, for instance,
18/ See, for example