By Laura Kusisto 

The Federal Reserve Bank of San Francisco wants banks to get extra credit for making loans that help communities adapt to climate change and prepare for future natural disasters.

A paper released on Monday by researchers at the San Francisco Fed argues that banks should receive credit for climate-adaptation investments under the Community Reinvestment Act, which requires banks to lend to low- and moderate-income communities.

The report represents the latest in a series of small steps by Federal Reserve banks to recognize climate change as a threat to the U.S. financial system.

"As we're seeing this increase in the severity of disasters, people at all levels are thinking about how can we reduce the cost in the future and how can we reduce the financial strain on communities in general?" said Elizabeth Mattiuzzi, a senior researcher in the community-development department at the San Francisco Fed, who co-wrote the paper.

The 1977 Community Reinvestment Act was passed to stop "redlining," a form of lending discrimination. The Federal Reserve and other regulators examine banks every few years for compliance with this complex law.

These regulators are trying to revamp the rules in a way that would make the law more relevant today. It is unclear if any potential changes involving climate change would be on the table, but the researchers said they fit with efforts to make the rules clearer.

Banks receive credit for investments that help areas recover immediately after federal-disaster declarations. The researchers argue that banks should also be able to receive credit for investments that help prepare communities for future disasters.

Funds, for example, could be used to retrofit homes to withstand extreme temperatures or flooding. Banks could receive credit for helping to fund developments for low- and moderate-income residents in areas where people are being forced to abandon the coastline.

Banks could also contribute in advance to a fund to provide emergency loans to small-business owners in the immediate aftermath of a natural disaster, so a program doesn't have to be created from scratch when something occurs.

Examiners who determine whether banks should receive credit for investments have discretion within broad federal guidelines and could look to the San Francisco findings for guidance.

"We're hoping this work will provide tools for banks and examiners to think differently about this issue," Ms. Mattiuzzi said.

The San Francisco Fed has been ahead of many other banks in the Federal Reserve system in advocating more action on climate change and natural disasters. An economist and executive vice president at the San Francisco Fed this spring published a paper saying that "climate change -- and efforts to limit that change and adapt to it -- will have increasingly important effects on the U.S. economy."

Federal Reserve Chairman Jerome Powell said in April that the Fed is working to ensure banks are prepared for shocks tied to a warming global environment.

"Climate change is something regulators are thinking more and more about, " said Jesse Keenan, a professor at Harvard University who co-wrote the paper.

Mr. Keenan said banks have an incentive to invest in mitigation because it helps protect their investments, such as in mortgages on coastal homes and commercial properties.

"We need banks to engage in helping manage climate risks because that's good business," Mr. Keenan said.

Rachel Ensign contributed to this article.

Write to Laura Kusisto at laura.kusisto@wsj.com

(END) Dow Jones Newswires

June 17, 2019 12:40 ET (16:40 GMT)

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