Letter to Hon. Jerome Powell, Chair of Board of Governors of the Federal Reserve System - Sens. Cramer, Toomey, GOP Banking Members Caution Federal Reserve Against Climate Change Regulations

Letter

Dear Chair Powell,
As you have previously acknowledged, "society's broad response to climate change is for others
to decide--in particular, elected leaders."1 We agree with that sentiment, but remain concerned
that the Federal Reserve Board (Federal Reserve) may be preparing to use financial regulation
and supervision to further environmental policy objectives. That would be beyond the scope of
the Federal Reserve's mission. We urge you to refrain from taking any additional actions with
respect to climate-related risks that would impose certain costs for uncertain benefits.
The Federal Reserve's recent actions suggest that the Federal Reserve may be considering using
its financial regulatory authority to play an indirect role in regulating climate change. Last year,
the Federal Reserve included climate change in its report on financial stability for the first time,2
and then announced that it joined the Network of Central Banks and Supervisors for Greening
the Financial System.3 Following that announcement, the Federal Reserve established a new
"Supervision Climate Committee" to further analyze the potential implications of climate change
for financial institutions, infrastructure, and markets.4 And last month, Federal Reserve Governor
Lael Brainard suggested that the Federal Reserve may consider subjecting banks to "[c]limate
scenario analysis."5 We question both the purpose and efficacy of climate-related banking regulation and scenario analysis, especially because the Federal Reserve lacks jurisdiction over
and expertise in environmental matters.
We are also concerned about the value of assessing banks based on inherently uncertain climate
models. While regulators, including Federal Reserve researchers and global bodies, have
emphasized the need to address gaps in climate data,6
there are also substantial methodological
challenges associated with assessing climate-related risks that undermine the usefulness of this
endeavor. As researchers have noted, current climate models provide little financially
meaningful information.7 Also concerning is the possibility of assessing banks against
predictions of what the climate may look like decades in the future--predictions climate
scientists have acknowledged are inherently and irreducibly uncertain.8 Nor can financial
institutions be certain of their business model or holdings in the future. Contrary to the
misguided assertion that energy-related assets will become "stranded" during a transition to
alternative energy sources, the underlying economics do not forecast such a decline in value.
Rather, a major threat to these assets is the effort by regulators to impair their value, including
through onerous regulations and increased financing costs. This effort is not grounded in science
or economics, but is instead a self-fulfilling prophesy: claim there are financial risks with energy
exploration and other disfavored investments then use the levers of government--via the
unelected bureaucracy--to ban or limit those activities. Such an approach raises serious
questions about the relative costs and benefits of climate-related banking regulation.
These suggestions also raise the troubling possibility that the Federal Reserve could similarly
seek to impose heightened regulation based on other catastrophes such as a global pandemic or
widespread famine, scenarios that clearly fall outside the scope of financial regulators' purview.
Simply put, financial regulation does not and should not seek to guard against every type of
unforeseen event; rather, it should ensure that financial institutions are resilient and have the
capability to withstand unique economic and financial market stresses as they arise.
Finally, banks are in the best position to assess and price for risks in their portfolios. We
recognize that many banks do have asset portfolios with exposure to severe weather events. For
example, banks with residential and commercial loans in certain coastal areas may be impacted
from such events more so than banks in other parts of the country.
9 However, banks are in the
best position to consider all applicable risks--including climate-related risks--in their lending
activities, and research shows that banks do indeed price in climate-related risks.10 Due diligence requires banks to consider all applicable and reasonable risks in their lending activities, but they
should not stop doing business with entire sectors of the economy simply to manage political and
reputational risk. Rather, they should review applications for services on a case-by-case basis,
looking for standard metrics like creditworthiness and financial viability. If there is a genuine
risk to a particular institution that arises from climate-related issues and has yet to be priced into
the market, it is the bank's role to evaluate it and respond accordingly. Any actions in response
to risks, including those related to severe weather events, are properly made by the bank's board
of directors and senior management--not proscribed by regulatory dictum.11
As you continue to analyze the potential implications of climate change for financial institutions
and markets, we urge you to remain mindful of both the inherent challenges of modeling severe
weather events and the limits of the Federal Reserve's statutory authority in this area. Moving
forward, we call on the Federal Reserve to be fully transparent with this process and undertake
public notice and comment on any contemplated changes to bank regulation or supervision that
could result from the Federal Reserve's analysis.
Thank you for your consideration of our views on this issue.

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