Confronting the ‘Climate Lehman Moment’: The Case for Macroprudential Climate Regulation

49 Pages Posted: 18 Mar 2020 Last revised: 23 Nov 2020

See all articles by Graham Steele

Graham Steele

U.S. Department of the Treasury

Date Written: February 22, 2020


U.S. financial regulators have argued that the risks that climate change poses for large financial institutions are outside of their core regulatory mandate. This article argues that oversight of the largest financial institutions’ financing of significant amounts of fossil fuels and other carbon-intensive businesses has implications for financial stability, and is therefore a central responsibility for financial regulators. This article outlines the various financial risks of climate change. It then analyzes the case for classifying climate change as a systemic risk to the stability of the financial system. In doing so, it explores how we understand systemically risky activities, how this understanding applies to the climate financial risks created by the largest financial institutions, and the public harms created by climate financial risk, namely negative externalities and more hazard. As a result of the above examination, this article then lays out a framework for macroprudential regulation to curtail the financial risks caused by climate change, namely the funding of climate change drivers. It further identifies legal authorities available to U.S. financial regulators that provide a basis for issuing specific macroprudential regulations that could address the risks from, and role played by, large financial institutions’ financing of the industries and activities that drive climate change. This article further argues that the U.S. response to climate financial risk has been out of step with the international consensus on the magnitude of the risk. It concludes by observing that macroprudential climate regulation would, in addition to preventing a climate-driven financial crisis and mitigating the potential macroeconomic fallout from a systemic climate event, also assist in the effort to ensure an orderly transition from a carbon-based economy to an economy that is less reliant upon carbon-intensive energy sources.

Keywords: Climate Change, Systemic Risk, Financial Stability, Financial Stability Oversight Council, Federal Reserve, Macroprudential Regulation, Activities-Based Regulation, Dodd-Frank Act

Suggested Citation

Steele, Graham, Confronting the ‘Climate Lehman Moment’: The Case for Macroprudential Climate Regulation (February 22, 2020). 30 Cornell J.L.& Pub. Pol'y 109 (2020), Available at SSRN:

Graham Steele (Contact Author)

U.S. Department of the Treasury ( email )

1500 Pennsylvania Avenue, NW
Washington, DC 20220
United States

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