December 9, 2020

The Honorable The Honorable Chairman Vice Chairman for Supervision Board of Governors of the Board of Governors of the Federal Reserve System System 20th Street and Constitution Avenue Northwest 20th Street and Constitution Avenue Northwest Washington, DC 20551 Washington, DC 20551

Dear Chairman Powell and Vice Chairman Quarles:

We write to you with concerns about the Federal Reserve Board potentially introducing climate change scenarios into its supervisory stress tests of regulated banks. We urge you not to entertain implementation of such scenarios without due consideration of their methodological shortcomings and challenges, and the potential downstream impacts on regulated banks’ commercial clients and the millions of consumers they serve.

Some European regulators, including the , have proposed frameworks for incorporating climate change into regular stress tests of supervised financial institutions. Unfortunately, those suggested paths forward are plagued with speculation, inconsistencies, and reliance on long-term projections that may not adequately account for shifting market dynamics. It would be unwise for U.S. regulators to mirror the efforts of their European counterparts without first conducting extensive review.

In recent testimony before the Senate Committee on Banking, Housing and Urban Affairs, Vice Chair Quarles indicated that the Fed requested to join the Network for Greening the Financial System (NGFS), a consortium of central banks intent on using the levers of financial supervision to address climate change. To date, the NGFS has developed and published recommendations that could significantly limit access to capital for crucial industries and place harmful restrictions on regulated entities. We urge you not to join the NGFS without first making public commitments to only accept and implement in the U.S. recommendations that are in the best interest of our domestic financial system, would not disproportionately disadvantage U.S. banks compared to their European competitors and would not have harmful impacts on the customers those banks serve.

A number of methodological challenges could negatively impact the effectiveness and reliability of climate change stress testing. Any meaningful effects associated with changes in weather patterns would materialize over the course of decades. It would be difficult for a bank to accurately forecast stresses over that length of time, and inappropriate for regulators to assume a bank’s operational and risk management practice would remain stagnant over that time horizon. Current stress testing is conducted based on a time horizon of less than three years, across which banks may make forecasts with confidence. Using periods in excess of ten times current practices would compromise the reliability of the tests. To underscore this point, there is no consistent methodology that is comparable across geographies, time periods, or business models that in any way provides boards, regulators or investors reliable information.

Further, a lack of historical data on the relationship between changing weather patterns and financial stress would complicate the prospect of stress testing climate change scenarios. Current supervisory stress tests rely on large amounts of data related to credit losses across varying market conditions. The same quantity and granularity of data does not exist for climate-related financial stresses, and the available data may have gaps or a disqualifying level of subjectivity.

It is worth noting that enhanced risks from wildfires in the West or hurricanes in the Gulf of Mexico or East Coast are cited as reasons for imposing additional climate-focused standards by financial institutions. Yet, these enhanced risks to insured property could also be attributable to poor local zoning standards and building policies that increase the density of commercial and residential structures. Lenders could well benefit from greater prudence by local governments and may show these sites should not have been built upon in the first place—with or without climate change impacts. Additionally, as a reminder, publicly traded financial institutions already have a legal obligation to disclose material risks to their financial statement valuations and potential earnings impacts and regulated depository institutions already have extensive risk assessment requirements mandated by regulation and accounting standards.

Lastly, we are also concerned that introducing climate change scenarios into stress tests could accelerate the ill-advised pattern of “de-banking” legally operating businesses in industries, such as coal and oil and gas, that are politically unpopular to certain vocal policymakers. Over the last several years, we have seen banks make politically motivated and public relations-focused decisions to limit credit availability to these industries. It is possible that the introduction of climate change stress tests could perpetuate this trend, allowing regulated banks to cite negative impacts on their supervisory tests as an excuse to defund or divest from these crucial industries. Politicizing access to capital and choking off funding to industries that millions of Americans rely on is unacceptable, especially in times of economic and financial uncertainty.

We urge the Fed to proceed cautiously and deliberatively as it evaluates whether to inject climate risk scenarios into supervisory stress tests. The challenges described above suggest the Fed should not proceed without a full review and should not simply adopt the European model. Further, we ask the Fed to consider the downstream impacts on consumers of any undue, ill-defined regulatory burdens placed on regulated banks.

Thank you for your consideration.

Sincerely,

Andy Barr Member of Congress Member of Congress

Roger Williams Member of Congress Member of Congress

Ann Wagner Member of Congress Member of Congress

Anthony Gonzalez Member of Congress Member of Congress

Lance Gooden Member of Congress Member of Congress

Bruce Westerman Member of Congress Member of Congress

John Joyce, M.D. Member of Congress Member of Congress

David Kustoff Fred Keller Member of Congress Member of Congress

Bill Flores Member of Congress Member of Congress

Kelly Armstrong Rick Allen Member of Congress Member of Congress

Pete Olson K. Michael Conaway Member of Congress Member of Congress

Bill Huizenga H. Member of Congress Member of Congress

Jeff Duncan Member of Congress Member of Congress

Greg Pence Member of Congress Member of Congress

Chip Roy Mark E. Green, M.D. Member of Congress Member of Congress

Gary Palmer Member of Congress Member of Congress

Brian Babin Member of Congress Member of Congress

Debbie Lesko Member of Congress Member of Congress

Tom Emmer Member of Congress Member of Congress

Trey Hollingsworth Bill Johnson Member of Congress Member of Congress

Steve Stivers John Rose Member of Congress Member of Congress

Scott Tipton Michael McCloud Member of Congress Member of Congress

James Comer Member of Congress Member of Congress

William Timmons Member of Congress