New York Fed researchers publish details of climate stress test

September 27, 2021|Written by David Clarke|Federal Reserve

Researchers at the Federal Reserve Bank of New York have published details of a stress testing procedure designed to assess banks’ resilience against climate-related risks. The report is the first of its kind released by a US financial supervisor and may represent an initial step towards a climate stress-testing regime.

The release of the report on Friday comes after Jerome Powell, chair of the US-wide Federal Reserve System, said in July that “there’s a lot to like about climate stress tests”, and that the central bank was in the early stages of considering the idea.

The Fed currently lags behind its peers on climate stress-testing. The European Central Bank plans to carry out a supervisory climate stress test next year, and the Bank of England is studying the climate resilience of large banks and insurers through its 2021 Biennial Exploratory Scenario.

The New York Fed paper, simply titled Climate Stress Testing, outlines exactly how supervisors could go about checking the vulnerability of banks and the financial system to shocks resulting from the global effort to reduce emissions.

The researchers developed a metric for measuring climate risk, which is the expected capital shortfall of a financial institution in the event of a climate-related shock.

Using Citigroup as an example, the researchers said that had the bank been subject to a climate stress scenario in 2020, it would have needed to raise an extra $73 billion in order to return its capital ratio to a safe level.

After criticism from lawmakers and civil society groups that it has failed to meet the urgency of the challenges posed by climate change, the Fed looks finally to be ramping up its efforts. Earlier this year, it announced the formation of a Financial Stability Climate Committee and Supervision Climate Committee, bringing together senior staff from across the Fed system to understand the potential risks and put together a programme to address them.

This page was last updated September 29, 2021

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