Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell said Tuesday that they are moving full steam ahead with plans to assess the implications of climate change to the financial system.

“It is an exploration in understanding better what are the risks to the financial system. We feel like that’s our obligation,” Powell told the House Financial Services Committee in testimony.

Yellen, testifying alongside Powell, said that financial institutions and regulators need to “better understand the risks that climate change poses to the health and resilience” of the financial system.

Their commentary suggests that U.S. regulators will continue to ramp up efforts to supervise how banks and other financial institutions evaluate and disclose their exposure to extreme weather events.

The Fed, which serves as a primary regulator for the largest banks, has already made initial steps toward a formal approach to climate risks. Fed Governor Lael Brainard has been leading efforts within the central bank, floating the possible use of “scenario” tests to gauge the strength of a bank to withstand different hypothetical climate shocks.

The central bank recently created a Supervision Climate Committee (SCC) to establish a framework for assessing firm risks.

System-wide response

In a speech Tuesday at a separate event, Brainard announced that the Fed is establishing a Financial Stability Climate Committee (FSCC) that will involve the Fed’s 12 outposts (or “reserve banks”) scattered across the country. Whereas the SCC will deal with firm-level supervision, the FSCC will be tasked with “developing and implementing a program” to assess climate-related risks to the broad financial system.

The Fed, however, does not regulate all financial firms. But as Treasury Secretary, Yellen also serves as the head of the Financial Stability Oversight Council (FSOC), which includes eight federal regulators and three state regulators among its members.

“I believe FSOC can play a role in arranging discussions among financial regulators...to coordinate a system-wide response using the best-available tools,” Yellen told Congress Tuesday.

Yellen specifically advocated for better data collection and “high quality” financial disclosures.

Responding to some Republican members’ concerns that the regulators would punish banks that lend to fossil fuel companies, Yellen emphasized that she did not feel FSOC would have a role in telling the industry what kind of lending it can do.

Powell also pushed back on the idea that the Fed is pushing the boundaries of its legal authority in assessing climate risk. The Fed chairman said getting a pulse on risks to the financial system are one of the Fed’s main roles, adding that banks are already doing these types of assessments themselves.

“We don't a have new mandate,” Powell said. “This is consistent with our existing mandate of supervision of financial institutions. It's just the same mandate but a different risk.”

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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