Federal Reserve leaders are sounding the alarm on financial risks from climate change
By Anne Perrault
In recent weeks, key Federal Reserve leaders, including Chair Jay Powell and outgoing Vice Chair for Supervision Michael Barr, have been unusually blunt about the impacts climate change will have on the financial system, a topic from which the Fed typically shies away.
In testimony before the Senate Banking Committee, Powell acknowledged, for the first time, a striking and alarming reality: Climate change will soon leave significant numbers of people without access to mortgages and other essential financial services. Powell stated, “If you fast forward 10 or 15 years, there will be regions of the country where you can’t get a mortgage, there won’t be ATMs, banks won’t have branches and things like that.”
At the same time, Powell downplayed risks to banks and insurance companies currently operating in these climate-vulnerable areas, noting, “It’s not that the banks will stay there and keep making loans in the face of evidence of disasters, or that insurance companies will write policies.” Concerningly, Powell remained silent on the Fed’s responsibility to address the American public’s lack of access to financial services as well as the broader financial stability concerns this reduced access portends.
In what would likely be his final speech as Vice Chair for Supervision, Barr provided a more honest, informed, and clear-eyed take on the Federal Reserve’s role in response to climate change. He explicitly underscored that the Fed’s responsibilities aren’t limited to maintaining the safety and soundness of individual banks, as Powell suggests, but also include preserving access to financial services and addressing broader financial stability impacts. Barr stated, “The Federal Reserve has a responsibility to recognize emerging risks to the safety and soundness of banks, to the ability of households and businesses to access financial services, and to financial stability. Costly natural disasters could present just such risks.”
Barr recognizes a fundamental truth obscured by Powell’s recent remarks. The purpose of banks and the broader financial system isn’t limited to serving only the largest financial institutions. The financial system provides critically important financial services—including property insurance and mortgage and personal credit—to individuals and families in the U.S., including those in low- and moderate-income communities. The Federal Reserve has a vital, and not yet met, responsibility to address threats climate change poses to the continued broad-based availability of these financial services.
Barr described recent disasters, including the Los Angeles wildfires, as a “wake-up call” for the Federal Reserve. It’s long past time for the Federal Reserve to treat climate risk as the unprecedented significant financial risk it is, including by taking the following measures.
The Federal Reserve must act on the financial stability threats of climate change, including those related to the insurance crisis and to the loss of access to credit.
As Barr acknowledged, climate change impacts more than just the safety and soundness of the largest banks under the Federal Reserve’s supervision. The insurance crisis is creating a flow of risk from insurers to consumers to lenders (banks and nonbanks), municipalities, and investors that pose additional financial stability threats the Federal Reserve must address. Homeowners who are uninsured or underinsured are financially vulnerable to climate events. The cost burden of rising property insurance premiums drives up household indebtedness and mortgage delinquencies.
Banks, mortgage lenders, Government Sponsored Enterprises, and investors who hold mortgage assets are also exposed to climate risk. In the event of climate disasters, these institutions can face material distress, threatening broader financial stability. Erosion in insurance and mortgage markets, as well as climate disasters themselves, threaten the viability of municipal budgets and local economies. Increased expenditures, reduced tax revenue, and higher cost of capital can create a financial doom loop for climate-vulnerable municipalities.
Moreover, while Powell discounts the significance of climate-related reductions in access to credit for individuals and families, such access is essential to the well-functioning of the U.S. economy. Each of these issues requires urgent attention and action by the Federal Reserve.
The Federal Reserve must act to preserve its independence.
In February, President Trump issued an executive order targeting independent federal agencies, including the Federal Reserve’s supervisory functions, anti-constitutionally requiring administration oversight of the Federal Reserve’s rulemaking authority, among other impacts. This executive order, if implemented, will greatly limit the Federal Reserve’s ability to respond to climate-related financial risks, bringing its regulatory authority under a White House committed to climate denial and reckless financial deregulation.
The Federal Reserve’s independence enables it to consider all threats to the safety and soundness of the banks it supervises and to financial stability, even if these risks conflict with political priorities and personal or financial interests of an administration’s senior leaders. To promote economic and financial stability, including a stable banking system and access to mortgage and personal credit, independence must be preserved. The Federal Reserve must do all it can—including enlisting the support of policymakers—to accomplish this.