By Saeed Azhar and Lananh Nguyen
NEW YORK (Reuters) -A senior Federal Reserve official said the central bank still was considering all its options for how best to gauge risks for banks from climate change, as a fellow U.S. banking regulator urged an open mind to a wide range of approaches.
Kevin Stiroh, a senior Fed advisor overseeing its climate change efforts, told bankers gathered in New York on Wednesday the central bank was still in the early stages of building tools to better measure financial risks from climate change.
"We haven't made any changes at the Fed in terms of what we might do in terms of climate-related scenario analysis. We haven't changed anything with regard to our stress tests. We're still considering options," he said at an industry conference.
The Fed, which already conducts annual stress tests of how large banks would fare against severe hypothetical losses, is currently working on building "scenario analysis" that would allow it to similarly assess the scale of bank losses from climate change. Regulators are keen to get a grasp on risk in the sector as rising sea levels, worsening floods and fires, and government policies transitioning away from carbon-heavy industry could impact trillions of dollars in assets.
Reuters had previously reported Wall Street banks expects the Fed to run its first climate "scenario analysis" of large firms sometime in 2023. Stiroh did not discuss any timing Wednesday.
His comments came shortly after Michael Hsu, the acting Comptroller of the Currency, said regulators should assess a range of climate scenarios rather than pursuing standardized stress tests. He said while there is an urgent need for action to measure this new type of risk, both the industry and its watchdogs need to approach the emerging issue with "a clean sheet of paper and an open mind."
In particular, Hsu said ongoing efforts to build tools to measure hypothetical losses from future climate change scenarios need to prioritize a diversity of approaches rather than a standardized, comparable approach similar to what banks already undergo in annual "stress tests" of their finances.
Given the uncertain nature of climate-related financial risks, he said there is more value in coming up with a wide range of ways to probe weaknesses. His remarks also indicate regulators are not currently considering a regime for climate risk that is similar to stress tests, whose results set capital requirements for specific firms.
"With climate-related risks, I believe we are much more exposed to failures of imagination — not asking enough 'what if?' questions — than we are to failures of stringency or consistency," he said, according to prepared remarks. "I am concerned that the muscle memory of capital stress testing is more likely to handicap climate scenario analysis than to help it."