Senate bill would require Fed to develop stress tests for climate risks

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WASHINGTON — Sen. Brian Schatz introduced a bill Wednesday that would require the Federal Reserve to study and manage climate-related risks to the financial system.

The Climate Change Financial Risk Act would mandate that the central bank form an advisory group of climate scientists and climate economists to help develop climate change scenarios for the financial stress tests.

“While our federal regulators are legally obligated to manage and reduce risks in the financial system, they have been ignoring the growing financial risks of climate change,” the Hawaii Democrat said in a press release. “We should not be treating some risks different from others: risks are risks. This bill will push the Fed to do their job and start taking climate risk seriously.”

The legislation is also co-sponsored by five of the senators currently running for president — Sens. Elizabeth Warren, D-Mass., Amy Klobuchar, D-Minn., Kamala Harris, D-Calif., Cory Booker, D-N.J., and Michael Bennet, D-Colo.

The bill calls for the Fed to develop three climate-related stress test scenarios: a 1.5 degree Celsius warming scenario, a 2 degree scenario, and a “business as usual” scenario, which assumes a higher level of warming based on current climate policies. The Fed would be required to conduct the stress tests every two years for financial institutions that are currently subject to Comprehensive Capital Analysis and Review, or CCAR.

The tests would require financial institutions to create and update a qualitative plan that describes how they will evolve capital planning practices to limit the financial impacts of future climate risks. The bill would give the Fed the authority to object to an unreasonable or ineffective climate risk capital plan. If the Fed objects to a bank’s plan, the institution will not be able to proceed with capital distributions until the objection is lifted.

Companion legislation has been introduced in the House of Representatives by Rep. Sean Casten, D-Ill.

“U.S. consumers deserve to have confidence that our financial institutions are adequately prepared for these risks and won’t be caught unaware as they were in 2008,” Casten said.

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