Oct 5, 2022

Six Major Banks to Participate in Fed’s Climate Scenario Analysis Exercise

Oct 5, 2022 | Banks, Market

By: Ken Chase.

The Federal Reserve confirmed Thursday that it has recruited six of the largest U.S. banks as participants in its planned climate scenario analysis exercise. In a press release announcing the exercise, the Fed said that the pilot exercise will be designed to test the banks’ resilience to a variety of hypothetical climate change scenarios. The exercise is expected to begin early in 2023 and last throughout most of the year.

According to the Federal Reserve, participating banks will include Goldman Sachs, Wells Fargo, Citigroup, JPMorgan Chase, Banks of America, and Morgan Stanley. Prior to the launch of the exercise, the Fed Board is expected to unveil the details of the various hypotheticals it plans to test, including variables related to economic conditions, financial situations, and different climate scenarios.

The Fed also suggested that it would publish insights gained from the exercise in the aggregate, without any bank-specific details. Those insights will include information about any identified risks, suggested risk management proposals, and other lessons learned about potential risk-mitigation strategies that banks can adopt to ensure that they can manage potential climate-related threats.

As the Fed notes in its release, the climate scenario pilot has no relation to regulators’ periodic bank stress tests:

“Climate scenario analysis is distinct and separate from bank stress tests. The Board’s stress tests are designed to assess whether large banks have enough capital to continue lending to households and businesses during a severe recession. The climate scenario analysis exercise, on the other hand, is exploratory in nature and does not have capital consequences.

By considering a range of possible future climate pathways and associated economic and financial developments, scenario analysis can assist firms and supervisors in understanding how climate-related financial risks may manifest and differ from historical experience.”

The Federal Reserve has been under pressure from the political left in recent years to focus more on climate risk, with many climate change activists noting that similar scenario analysis exercises have been conducted in other countries. The timing of the current proposal comes as the Fed continues to struggle to get 40-year-high inflation under control in the midst of a worsening U.S. economy that is already in recession.

Meanwhile, an October 1 article by the Bank Policy Institute (BPI) suggests that the exercise may be unnecessary. According to BPI, there are already existing studies by the New York Fed’s Staff and the FDIC that found no evidence that weather events and other FEMA disasters caused any significant impact on the performance or stability of the nation’s banks. The BPI concluded that:

“In recent years, regulatory officials across the globe have proposed climate risk management measures, released climate scenario analysis exercises and unveiled disclosure requirements. This flurry of regulatory and supervisory activity appears to be out of step with the level of material climate-related risk to large banks’ balance sheets. Climate risk should be understood and carefully managed but does not seem to represent a meaningful risk to large banks’ balance sheets.”

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