Janet Yellen Says Higher Bank Capital Rules for Climate Risk Are ‘Premature’

(Bloomberg) -- Treasury Secretary Janet Yellen said it's too early to contemplate adjusting capital requirements for U.S. banks based on how much risk they face from climate change.

“It's just premature at this point to talk about raising capital requirements,” Yellen said Wednesday in an interview with Bloomberg News. Before that could happen, she said, “it's really important that regulators do the groundwork that's necessary for them to evaluate risks to individual firms.”

How regulators incorporate climate risks into the safety and soundness rules they enforce on the largest financial institutions has become an increasingly contentious debate in Washington. Some Democrats have pushed for a much more aggressive approach that looks not only to protect financial stability but also to speed the economy's transition toward clean energy.

Many Republicans have argued that choking off credit to the fossil-fuel industry would damage the economy and amount to regulatory interference not endorsed by Congress. The debate has become particularly pointed over the Federal Reserve, which conducts regular stress tests on big U.S. lenders to assess their ability to withstand adverse scenarios.

Yellen was speaking a day before Sarah Bloom Raskin, President Joe Biden's pick as the Fed's vice chair for supervision -- a key oversight post -- appears at a confirmation hearing at the Senate Banking Committee. Raskin is set to face a barrage of questions from Republicans over her advocacy of the Fed doing more to address climate risks.

Republican Angst

“There is no American financial institution that is at risk of failure because of the climate,” Pat Toomey, the top Republican on the Senate Banking panel, said in an interview with Bloomberg Television's “Balance of Power with David Westin” Wednesday. “There's no mystery here. They want to systematically make capital more expensive and less accessible” to transition from fossil fuels to other forms of energy, he said.

Even so, the Financial Stability Oversight Council -- a panel of regulators that Yellen chairs and includes the Fed -- has shown no readiness to recommend that climate risks be incorporated into stress tests, which annually evaluate individual banks and help set capital requirements. FSOC has, however, begun studying the threat of climate change to financial institutions and markets.

“Regulators need to evaluate the impact of climate change on the firms that they supervise and work through that,” Yellen said Wednesday.

Some critics have claimed that European regulators, including the Bank of England, are well ahead of the U.S. in respect to putting climate risk into stress tests, but Yellen rejected that assertion.

“We are not behind other countries in terms of where we are on this,” Yellen said. “I think the Bank of England is probably the most advanced, and we're not terribly far behind the Bank of England in the work that we're doing.”