The federal regulators warned for the first time in an annual report to Congress that climate change was an emerging threat to the U.S. financial system.
The Financial Stability Oversight Council, a group of top financial regulators led by the Treasury secretary, offered a grim assessment of how the effects of rising temperatures could spread, hurting property values and saddling insurers, banks and pensions that are associated with the sector with heavy losses. The council released an analysis of climate risk in October.
The document said that climate change will lead to increased economic and financial costs.
The report stopped short of the kinds of policy prescriptions that environmental groups and progressive Democrats have been calling for, such as tougher rules requiring banks to assess their ability to withstand climate-related losses, new capital requirements or curbs on extending financing to fossil fuel companies. The October report called for improved data for evaluating climate-related financial risks and more uniform disclosure requirements to help investors make better informed decisions.
The final F.S.O.C. report did not mention climate change.
The financial system is facing ongoing uncertainty nearly two years into a global pandemic that is being gripped by a new variant and the warning on climate change is one of several threats.
In its annual report, the panel warned that higher than expected inflation could lead to higher interest rates and losses at some financial institutions, which could affect the recovery.
The Federal Reserve said this week that it would raise interest rates three times next year and end its monthly bond buying program sooner, in order to combat inflation.
The F.S.O.C. regulators said inflation in advanced economies was caused by an increase in commodity prices, supply chain disruptions and labor shortages. They warned that a rapid or unexpected rise in interest rates could cause sharp contractionary forces and that it was unclear how long inflation would last.
The report said that the question of whether longer-term inflation expectations of households and businesses will rise or become unanchored was raised by the advent of higher inflation.
The trajectory of the global economy is a concern, as downturns in other countries could spill over into the U.S. financial system. The Chinese real estate sector is highly indebted and the prospect of a hard landing in China is a concern for regulators. China is a major consumer of steel, copper and iron Ore and a slowdown in the real estate market there could hurt global commodity markets.
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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won't go as far tomorrow as it did today. The change in prices for everyday goods and services is called the annual change in prices.
What causes inflation? It could be the result of increased consumer demand. There are developments that have little to do with economic conditions, such as limited oil production and supply chain problems, that can cause inflation to rise and fall.
Is inflation bad? It depends on the situation. Moderate price gains could lead to higher wages and job growth.
Can inflation affect the stock market? Trouble for stocks is usually caused by rapid inflation. During inflation booms, financial assets have been bad, while tangible assets have held their value better.
Changes to the economy that remain hard to comprehend are the result of the Pandemic.
The F.S.O.C. is concerned that the rise of teleworking could permanently shift demand away from office space in cities. If the shift leads to a rapid drop in valuations, it could cause a blow to small and mid-sized banks that hold property loans.
Corporate credit remains a concern, with leverage at non-financial corporations elevated compared with historical levels. Regulators are watching the airline, restaurant, and hotel industries, which have been hit hard by the swine flu, and warned that a wave of defaults or downgrades could be difficult for the financial sector to absorb.
There are new threats to the financial system.
Regulators said that digital assets, known as stable coins, are a potential source of vulnerability. They said that the value of digital assets remained highly volatile and that they could be subject to the risk of operational failures, fraud, and market manipulation.
The new technology could pose a risk to the financial system if investors are unable to cash in. The regulators said that stable coins could pose risks.
The F.S.O.C. does not have rule-writing power, but it can make regulators address market vulnerabilities and designate certain activities as "systemic" in need of stricter oversight.
