Fed’s Waller says climate rules are ‘Congress’s job’

Federal Reserve Gov. Christopher Waller said it is not the central bank’s job to factor climate change into its regulatory framework.

“When it comes to thinking about regulatory structure and environmental stuff, that's Congress's job,” Waller said Tuesday during an event at the Economic Club of Minnesota. “It's not the job of an unelected official like myself to say, ‘OK, here's this one of 10,000 types of shocks on the planet [that] you have to do special treatment for.’ ” 

Waller waded into the topic during a Q&A event with Neel Kashkari, the president of the Minneapolis Fed. An audience member asked what role environmental, social and governance standards, commonly referred to as ESG, might factor into future regulations and reporting requirements. 

Waller said much of the conversation around ESG is being driven by the private sector, but he acknowledged the role of climate change is one that is often debated in regulatory circles. He said it is the Fed’s job to tailor its requirements around the outcome of shocks, not specific causes.

“We give you an economic scenario, unemployment goes to 10%, housing prices collapse 30%. We don't say why, we just say that's the data, deal with it,” he said. “Somehow now, with climate change, we're giving a specific cause and saying, ‘OK, how are you going to deal with that specific cause?’ That’s a very different exercise.”

The role of climate change in prudential regulation has been a hot topic for agencies in and around the financial sector in recent years. Advocates, largely from liberal circles, argue regulators should ensure banks are adequately monitoring their exposures to assets that could be affected by climate change. Waterfront real estate that could be wiped out by rising sea levels is an often cited example. 

Yet, while climate change poses risks to certain assets as well as some states and regions, Waller said it does not rise to the level of a systemic threat that would warrant the involvement of the federal regulators. 

“The idea that there's some physical risks that will collapse the financial system like 2008, you cannot generate that out of  any climate change model,” he said. The biggest threat to current asset underwriting might be “transition risk,” he added, as policies governing carbon usage change. But such regulations do not happen overnight, Waller said, suggesting markets will have time to adjust.

Still, some assets in certain locations will need to be treated differently as climate conditions change, Waller said. Singling out Florida, the state most endangered by rising ocean waters, he said banks and consumers might have to think about real estate as fleeting investments. 

“If you're in Florida, you have to start thinking of your condo like a car,” he said. “It's just going to eventually fade away and then you'll get rid of it, it'll just melt into the ocean. But for 30 years, you had your condo and your nice view and you enjoyed it, just like your car until it just kind of went away.”

Those types of evolutions, Waller said, are best left for market participants to sort out on their own.

“At the end of the day, markets work,” he said. “Markets will price this risk just like any other risk. You may not like the price, but that's the price. Then you just let the markets do their jobs.”