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US launches data hub to assess systemic financial risk

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The US Treasury has announced a pilot scheme for a new Climate Analytics and Data Hub to support federal agencies in understanding, and responding to, systemic climate risks to the financial system.

The programme was instituted by the Treasury’s Financial Stability Oversight Council (FSOC) which was set up after the 2008 financial crisis. It was set up to create collective accountability across the financial system for identifying risks and responding to emerging threats to financial stability.

The pilot is being run through the Treasury’s Office of Financial Research (OFR). The OFR-hosted Climate Data and Analytics Hub is intended to allow regulators to integrate climate-related information from across the federal government with their own supervisory datasets.

Data hub to link FSOC agencies to wildfire, drought and atmospheric data

Such data will include, but not be limited to, US Department of Agriculture’s data on wildfire risk and crop conditions, temperature and precipitation data from NOAA’s Climate Prediction Center, and NASA’s data on atmospheric conditions. The reality is that much of the information about how the climate is changing, as well as about the impacts it is having, are siloed into different departments so cannot be effectively assessed.

As James Martin, Acting Director of the Office of Financial Research said: “Financial regulators need both financial and non-financial data, as well as high-powered computing capabilities, to effectively research climate-related financial risks.”

The collaborative environment will improve users’ access to public climate and public financial data, high-performance computing tools, and analytical and visualization software to gain deeper insight into climate-related financial risks and vulnerabilities.

Combining financial and climate data streamlines understanding of risk

Nellie Liang, the Treasury Department’s Under Secretary for Domestic Finance added, “Today, the Office of Financial Research is taking an important step toward enabling policymakers to better understand and address risks to the financial system posed by climate change.

By providing a shared database of both climate data and financial data and high-powered computing tools, OFR’s climate hub pilot will help streamline regulators’ access to this critical information, providing a new, more comprehensive view of climate-related financial risks.”

Integrating data necessary to prevent the next financial crisis

The challenge prior to the 2008 crisis was as the US Treasury said that ‘the US financial regulatory framework focused narrowly on individual institutions and markets, which allowed supervisory gaps to grow and regulatory inconsistencies to emerge—in turn, allowing arbitrage and weakened standards.

‘No single regulator had responsibility for monitoring and addressing overall risks to financial stability, which too often involve different types of financial firms operating across multiple markets leaving important parts of the system unregulated. The Dodd‐Frank Wall Street Reform and Consumer Protection Act addressed these problems through the creation of the FSOC.’

Climate change represents a risk to financial stability

The programme is also in response to President Biden’s Executive Order on Climate-Related Financial Risks in May 2021. This directed the OFR to assist the Secretary of the Treasury and the FSOC in assessing and identifying climate-related financial risk to financial stability, including the collection of data, as appropriate, and the development of research on climate-related financial risk to the US financial system

The goal is to enable FSOC agencies to better understand how changes in climate conditions could potentially affect financial stability.  Initially, access to the pilot, its data, tools and software, will be limited to the Federal Reserve Board of Governors (FRB) and the Federal Reserve Bank of New York (FRBNY), with the goal of expanding access to all the Financial Stability Oversight Council (FSOC) member agencies. The project is also an opportunity for the OFR to develop and test a scalable model for enhanced services to FSOC and its member agencies.

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