Lessons for climate risk from the Fed’s stress test lawsuit

By the time December rolled around, frankly, I was a little burned out.  In 2024, I wrote close to 100 articles – some of which were of reasonable quality – and I had just finished proofreading my book on climate risk that will be published later this month.  I badly needed a break for Christmas, which I spent travelling through Italy with my family.  I tried to write a couple of times during these three weeks, but the quality of my output was absolutely deplorable.

But now I’m back home, refreshed, and 2025 looms as another big year.  One of the things on my bucket list for 2025 is to self-publish a book.  Over the past 20 years, I’ve written so many articles that are just gathering dust on a cloud server somewhere.  Much of this work is timeless and therefore just as relevant now as it was when it was written.  I know Louie has been just as – possibly more – prolific, and it seems like such a pity that this older material goes unread.

I also want to go further and deeper into the world of climate risk. Hopefully, the publication of the book will help to enhance my notoriety in this field, for better or for worse.  Louie’s excellent work on Climate Proof is also gaining a lot of traction and I’ll be glad to ride on his coattails.

Lawsuit

So the big news that landed over the holidays was the lawsuit filed by the American Bankers Association and a number of other lobby groups against the Federal Reserve over “opaque aspects of [its] stress testing framework.”  

Put simply, the bankers are arguing that the Fed’s annual capital adequacy stress test – known as CCAR –  was “adopted in secret” and that the central bank’s models “[produce] vacillating and unexplained requirements and restrictions on bank capital.”  

This echoes a common gripe of the banks – that the stress tests are arbitrary, and therefore (possibly) capricious.  In their view, the capital charges imposed by the Fed (determined by the stress tests themselves) are too severe, and lenders should be allowed to free capital to boost their lending operations, thus making credit cheaper for American consumers.

Interestingly, the Fed responded proactively, declaring the day before the lawsuit was filed that it would act to improve the transparency of its models and try to reduce the volatility of the capital buffer they impose upon the banks.