The U.S. economy is facing serious long-term challenges due to the rising impact of extreme weather, according to Kevin Stiroh, former top climate risk official at the Federal Reserve. Stiroh, who left the Fed earlier this year after the central bank scaled back its climate risk efforts, warns that banks and investors will soon see the financial effects show up clearly in their records.
Stiroh says these climate-related shocks are not short-term or isolated. Instead, they represent lasting changes that could reshape how banks do business. But so far, many financial players have not fully figured out who will bear the biggest losses. Homeowners, insurers, banks, and those holding complex financial products may all be at risk.
During the Trump administration, the U.S. stopped tracking much of the data that helps banks predict climate risks. Without this crucial information, investments might be made without a clear picture of the future damage from hurricanes, wildfires, and other disasters. Stiroh points to recent events like last year’s hurricanes in North Carolina and California’s wildfires as examples of the huge damage these disasters cause—but the key question remains: who ends up paying for it all?
This uncertainty makes managing these risks very hard. Stiroh explains that climate shocks can lead to traditional financial problems like credit losses or operational disruptions. However, current ways banks handle risk will likely fall short. The situation demands new tools, better data, and fresh expertise.
In recent years, the Fed reduced its focus on climate-related financial risks. It disbanded its Climate Supervision Committee and other teams working on this issue, as reported earlier by Bloomberg. The Fed has also pushed back against global efforts to make banks more accountable for their climate exposure, influencing international bodies like the Basel Committee on Banking Supervision to weaken proposed climate rules.
This approach has put the U.S. at odds with other regions such as Europe. For instance, the European Central Bank now requires banks to track their climate risks more closely. Frank Elderson, a member of the ECB’s Executive Board, recently warned that extreme weather could threaten up to 5% of the euro-area economy within five years — an impact comparable to the global financial crisis.
Beyond government actions, research shows clear signs of growing financial risk tied to climate change. Fitch Ratings has alerted that up to 20% of rated companies might face downgrades because of climate pressures, especially sectors like fossil fuels and mining, which have received support from past U.S. policies. Meanwhile, insured losses from natural disasters continue to soar. The Swiss Re Institute estimates such losses could reach $145 billion this year alone, with a risk of “peak” loss years that can top $300 billion.
Since leaving the Fed, Stiroh has joined the think tank Resources for the Future. He continues studying how climate change affects the financial system, working with experts from Harvard and other institutions. He emphasizes that climate change is no longer a distant worry; it is happening right now and already shaping economic realities.
As extreme weather events grow more frequent and destructive, the challenge for banks, regulators, and policymakers is clear: they need to better understand and prepare for these risks before the next crisis hits.