Federal Reserve Chair Signals Climate Stress Tests Are Likely to be Implemented

On January 10, 2022, Federal Reserve Chair Jerome Powell addressed the likelihood of the implementation of climate stress tests at his confirmation hearing before the Senate Banking Committee. Powell stated it is “very likely” that climate stress tests—referred to by the Federal Reserve as “stress scenarios”— would be utilized as a “key tool.”

Powell clarified that climate stress tests are different than regular stress tests, which effect capital, as the Federal Reserve is only currently interested in implementing climate stress tests for the purpose of “ensuring large financial institutions understand all of the risks that they are taking, including the risks that might be inherent in their business model regarding climate change over time.”

When asked if the implementation of these tests would be a priority if he is confirmed for another term, Powell specified that “it is very likely to be a very important priority over the coming years”—potentially signaling his confirmation will have no impact on the regulatory scheme being considered. This is especially likely considering the multitude of federal regulators who are currently preparing plans to address the issue of climate risk management in the financial sector. 

Although the Federal Reserve is currently only considering climate stress testing for large institutions, financial institutions of all sizes should be aware of this shift in the regulatory scheme and should observe the treatment of these large banks to best prepare their institution for further regulation.