Fed’s Powell sees tweaks to key leverage ratio, climate analysis on agenda going forward

Jan 11 (Reuters) – Federal Reserve Chairman Jerome Powell said on Tuesday the Fed was seeking to change a key leverage requirement and saw climate stress scenario analysis as a “key tool to ensure that major US banks are aware of the financial risks associated with climate change. .

Specifically, Powell said the Fed was sticking to its plan to revise the “supplemental leverage ratio” (SLR), a major constraint on banking activity, after banks complained it had them. discouraged from investing in the US Treasury market.

His comments came during his renomination hearing before the Senate Banking Committee.

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U.S. Federal Reserve Board Chairman Jerome Powell listens during his Senate Banking, Housing, and Urban Affairs Committee renomination hearing on Capitol Hill in Washington, U.S. January 11, 2022. Brendan Smialowski /Pool via REUTERS

Concerns about the impact of the SLR on banking activity are growing, as the Fed seeks to abandon its bond-buying habits while reducing economic stimulus. The banks had claimed that the SLR, which directs banks to hold capital against investments regardless of their risk, effectively discouraged them from buying traditional safe assets like treasury bills.

The Fed was forced to temporarily waive the SLR after the Treasury market seized up in March 2020. The Fed let that relief expire a year later, but promised to review the SLR for potential improvement. Powell’s comments make it clear that labor is still on the Fed’s agenda.

Separately, Powell said climate-specific analysis of potential banking risks will be a “key tool” for federal banking supervisors going forward as the central bank seeks to catch up with its global counterparts in assessing risks. financial risks posed by climate change.

Reuters reported that the Fed had privately lobbied banks on how they assess this risk internally, and the banks believe the Fed could launch a “scenario analysis” of climate risks in 2023.

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Reporting by Dan Burns Editing by Bernadette Baum

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