Fed releases pilot climate scenario analysis details

January 18, 2023|Written by Todd Phillips|Federal Reserve

The Federal Reserve has released the scenarios that the largest US banks will have to consider to determine their resilience to climate change.

The pilot climate scenario analysis, as the Fed has called it, includes both qualitative and quantitative considerations covering governance and risk management practices, measurement methodologies, risk metrics, data challenges, and lessons learned. However, only six banks are being asked to take part.

The banks will be evaluated on their resilience to physical risk and transition risk. Physical risks will be considered under six scenarios: three of which include severe hurricanes hitting the north-eastern US in 2050, and three of which consider shocks for their real estate portfolios in another region of the country of the bank’s choosing. Transition risks will be considered under two scenarios from the third phase of scenarios developed by the Network for Greening the Financial System.

The scenarios were immediately criticised by climate advocates. Anne Perrault, finance policy counsel at Public Citizen, said in a statement that the scenarios “will understate the risks these major banks face from climate change” and that “the exercises capture only a portion of the total risks, for example, not capturing possible macroprudential contagion triggered by major hurricanes or a rapid low-carbon transition”.

The six bank holding companies that will participate in the pilot programme are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo. These institutions will be required to submit completed data templates, supporting documentation and responses to qualitative questions to the Fed by 31 July. Aggregated results are expected to be released by the end of 2023.

The release of the scenarios comes one week after chair Jerome Powell gave a speech in which he stated that the Fed will limit its involvement in climate policy to bank supervision. The Fed and its fellow US bank regulators are expected to finalise climate risk principles for banks with more than $100bn in consolidated assets in the coming weeks.

The Fed is the last of the major central banks to begin climate scenario analyses. The People’s Bank of China and Bank of England evaluated banks in the 2021, and the European Central Bank and Bank of Japan conducted tests in 2022. The ECB has also begun applying increased capital charges to a “small number” of banks that were found to have shortcomings.

This page was last updated January 19, 2023

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