Existential threat

Janet Yellen: Climate change poses ‘existential threat’ to financial markets

The FSOC focused on climate for the first time since Congress established the body in 2010.

By VICTORIA GUIDA

Treasury Secretary Janet Yellen on Wednesday called climate change “an existential threat” and the biggest emerging risk to the health of the U.S. financial system, pledging to marshal regulatory forces to guard against its harmful effects.

Yellen made the promise during her inaugural appearance as the head of the Financial Stability Oversight Council, a panel of top regulators tasked with policing Wall Street behavior that has the potential to crash the entire economy.

The council held its first public meeting under Yellen's leadership Wednesday and focused on climate for the first time since Congress established the body in 2010. The group includes the heads of the Federal Reserve and the Securities and Exchange Commission.

“We cannot only look back and learn the lessons of last year,” Yellen said at that meeting. “We must also look ahead, at emerging risks. Climate change is obviously the big one.”

Yellen's decision to put climate change at the top of the group's agenda underscored the escalating attention financial regulators are devoting to the economic impacts of global warming and rising sea levels. The SEC is considering new climate disclosure rules for public companies. The Fed is intensifying scrutiny of banks' exposure to climate-related risks.

“We know that storms will hit us with more frequency, and more intensity,” Yellen said. “We know warming temperatures might disrupt food and water supplies, leading to unrest around the world. Our financial system must be prepared for the market and credit risks of these climate-related events.”

At the meeting, the heads of independent U.S. financial regulators, some of which are still run by appointees of President Donald Trump, underscored the steps each of them were taking to better understand how financial assets and institutions in different regions might be hurt by severe weather events. They acknowledged how losses in those areas could feed out into financial markets, though modeling such outcomes is complex.

Federal Housing Finance Agency Director Mark Calabria, a libertarian regulator who oversees mortgage giants Fannie Mae and Freddie Mac, said his agency had just hired two environmental economists that would be starting work shortly.

Federal Reserve Chair Jerome Powell, also a Trump appointee, has presided over the formation of two internal committees on climate risk — one on issues of relevance to bank examiners and the other on potential risks posed to the stability of the entire financial system, the type that’s of most interest to FSOC.

“We’re committed to a robust and open dialogue as work evolves,” Powell said. “One of our goals is to make climate change a part of our regular financial stability framework. An added benefit to this adjustment is the ability to update the public on this essential work.”

Beyond climate change, Yellen is also focused on fragilities in the financial system highlighted at the onset of the coronavirus pandemic, when key debt markets experienced extreme stress.

Yellen said she is re-establishing an Obama-era working group within the council that will scrutinize hedge funds in particular and will also look at ways of making funding markets that serve as the lifeblood of the financial sector more resilient.

“If not for the swift actions of the Federal Reserve, Treasury, Congress and others, those stresses may have led to an even greater economic contraction,” she said. “Indeed, we are digging out of a deep hole now, but we should be mindful that the hole could easily have been even deeper.”