for release on delivery 11 : 10 a. m. est december 18, 2020 strengthening the financial system to meet the challenge of climate change remarks by lael brainard member board of governors of the federal reserve system at “ the financial system & climate change : a regulatory imperative ” hosted by the center for american progress washington, d. c. december 18, 2020 i want to thank the center for american progress for inviting me to join you in discussing climate change and the u. s. financial system. 1 let me start by noting these are my own views and do not necessarily reflect those of the federal reserve board or the federal open market committee. climate change and the transition to a sustainable economy have important implications for the financial system. the financial system can be a powerful enabler to help the private sector manage climate - related risks and invest in the transition. it is vitally important to strengthen the u. s. financial system to meet the challenge of climate change. meeting the challenge of climate change climate change is one of the major challenges of our time. 2 there is growing evidence that extreme weather events related to climate change are on the rise — droughts, wildfires, hurricanes, and heatwaves are all becoming more common. 3 climate - related events are already adversely affecting the lives of many americans. the economic and financial impacts are also increasingly evident : we are already seeing i am grateful to morgan lewis, beth kiser, carrie johnson, diana hancock, and nami mukasa, as well as norah barger, angelyque campbell, benjamin dennis, carol evans, joseph firschein, michael kiley, molly mahar, nancy riley, glenn rudebusch, john schindler, susan stawick, kevin stiroh, nicholas tabor, and aurite werman of the federal reserve for assistance in preparing this text. see intergovernmental panel on climate change, global warming of 1. 5°c. an ipcc special report on the impacts of global warming of 1. 5°c above pre - industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty ( geneva : intergovernmental panel on climate change ), https : / / www. ipcc. ch / sr15 /. see wmo task team, global warming and hurricanes : an overview of current research results ( princeton : geophysical fluid dynamics

valuable information to us and the public, since it suggests that these banks ’ trading and counterparty exposures may not be an unexpected source of vulnerability during a rising inflation scenario ( although that test did not explore the effects of unrealized losses from interest rate risk ). the exercise also provided important insight into banks ’ counterparty exposures in varying conditions, since banks ’ largest counterparties differed between the exploratory market shock and the global market shock. expiries of implied volatilities that are key inputs to the pricing of interest rate derivatives, selected expiries of futures prices for energy products, selected expiries of futures prices for metals and agricultural commodities, and credit spreads or prices for selected credit - sensitive products. as market makers, the banks subject to the stress test often take either long or short positions depending on the demands of their clients. as such, it is possible that at a given time, the firm is exposed to either rising or falling prices. building on these experiences, the federal reserve is developing both exploratory macroeconomic scenarios and exploratory market shocks for next year ’ s stress test. as i noted above, an exploratory scenario would not be used to set a firm ’ s stress capital buffer requirement. instead, the exploratory scenarios will be used to inform the board ’ s supervisory assessments of firms ’ risk management and our understanding of different risks in the banking system. using the additional stress test results let me speak to how we currently use the stress test, and how we could use exploratory scenarios going forward. a current use of the stress test is to help set capital requirements for large banks to help prepare firms to withstand a severe economic recession and continue to lend and operate. the key features of the scenario used to calculate the capital requirements are generally similar from year to year. since the stress test is used to set each firm ’ s stress capital buffer requirement, there is a benefit to predictability so that firms are better able to conduct capital and business planning. to the extent we were to adjust key features of the scenario used to set the capital requirements, we would do so through a transparent, public process. however, a tradeoff with producing predictable scenarios is stifling creativity in scenario design and less bank resilience to a range of potential scenarios, and this is where exploratory scenarios can help. the use of stress scenarios and shocks that do not set a firm ’ s