WASHINGTON — Federal Reserve Gov. Lael Brainard on Thursday downplayed the impact that the U.S. central bank could have on American climate-change policy and told lawmakers that federal regulators should not dictate whether banks can lend to oil and gas manufacturers.
Testifying before the Senate Banking Committee as the White House nominee for Fed vice chair, Brainard received a fairly warm welcome from Democrats, who lauded her work on
"Through her leadership, the Fed listened to the people whose lives and livelihoods are affected — civil rights leaders, affordable housing advocates, local officials and banks of all sizes,” said committee Chairman Sherrod Brown, D-Ohio. “She brought everyone to the table and is working to ensure banks meet the needs of all our communities.”
But Republicans throughout Thursday’s hearing had a near-universal focus on the risk of
“Gov. Brainard has urged the Fed to take an activist role on global warming, which is beyond the Fed’s expertise and mission,” Sen. Pat Toomey of Pennsylvania, the committee's ranking Republican, said in his opening remarks. “Not only does the Fed lack expertise in environmental matters, but there is no reason to believe that global warming poses a systemic risk to the financial system.”
Much like Fed Chair Jerome Powell during
Under concerted pressure from Republican lawmakers, Brainard told the senators she believed the Fed had a limited role to play in climate regulation, describing her risk framework as focused on the potential for “shocks” to the broader financial system stemming from increasingly severe weather and other climate events.
Asked by Sen. John Kennedy, R-La., whether federal financial regulators could discourage banks from lending to oil and gas manufacturers, Brainard replied, “No.”
“It's not our job. We don't tell banks what sectors to lend to,” Brainard added. “We just ask them to risk manage and have good processes” in place.
Brainard also emphasized later in the hearing that she believed the regulatory burden of climate-change regulations should not fall on community banks.
“I don’t favor asking community banks to put in place [that] kind of risk management,” Brainard told Sen. Cynthia Lummis, R-Wyo. “To the extent that supervisory guidance is appropriate, it's really appropriate for the large banks that have a big imprint, not for small banks. We don't want to burden community banks in particular.”
But Brainard did defend the Fed’s ongoing work to develop climate-scenario tests for banks, which she sought to distinguish from stress tests that can affect a bank’s capital requirements.
“Our scenario analysis would simply allow us to see where those risks are building up and are there certain counterparties that are very exposed in terms of covering those risks,” Brainard said.
Toomey later said that the difference between stress tests and scenario tests was “semantic.”
Meanwhile, Brainard extended another olive branch to Republicans and many banks when she said was open to making tweaks to federal regulators’ calculation of the supplemental leverage ratio, a long-simmering industry complaint exacerbated by an influx of liquidity during the pandemic.
Asked by Sen. Mike Rounds, R-S.D., whether regulators should adjust the supplemental leverage ratio to account for that influx of cash, Brainard replied that “because of the need to respond to the pandemic, there are a lot more reserves in the system, and I supported the removal of reserves from the leverage ratio for custodial banks.”
“I think it makes good sense — while keeping capital strong — to find a way to adjust that supplemental leverage ratio because of the much larger amount of reserves in the system,” Brainard added.
It remains unclear whether Brainard will find much support for her nomination from Senate Republicans, who frequently invoked fears of what they described as a rising tide of partisanship and politicization among federal regulators. “There are people on the left and in this administration who want the Fed to become more political — to become advocates for the causes and agenda that they support,” Toomey said.
Brainard, in her opening remarks, said she was “committed to the independent and nonpartisan status of the Federal Reserve.”
Still, the shadow of a
Toomey asked Brainard to explain how she viewed “the coup by three men, including one who’s serving on a term that expired three years ago, that forced out [FDIC Chair] Jelena McWilliams, a well-respected regulator from the once-independent FDIC.”
“I can’t speak to the FDIC,” Brainard replied, adding that she had “enjoyed working with” McWilliams. “We have a very different institution, and it's a very collegial institution. It is nonpartisan.”
Toomey responded by suggesting Brainard “reflect on what happened there; I think it is relevant.”
“The Fed, as you know, is also a multimember agency. It has prided itself on operating free from political interference and following norms of governance for many years,” Toomey continued. “That used to describe the FDIC, and unfortunately, it doesn't anymore.”
