Six of the nation’s largest banks will participate in a pilot climate scenario analysis exercise organized by the Federal Reserve Board that seeks to enhance climate-related financial risk management efforts in the industry.
Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo will take part in the exercise, which will launch in early 2023 and conclude by the end of the year, the Fed announced Thursday. The agency intends to publish insights gained from the program, though it will not attribute information to specific firms.
The Fed described climate scenario analysis as an “emerging tool” in the assessment of climate-related financial risks. Unlike stress tests—which Fed leaders have emphasized the importance of in speeches over the past year—scenario analysis is “exploratory in nature and does not have capital consequences,” the agency said.
“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 Fed stated.
Participants in the Fed program will “analyze the impact of the scenarios on specific portfolios and business strategies,” according to the agency. “The board will then review firm analysis and engage with those firms to build capacity to manage climate-related financial risks.”
Bank of America and Wells Fargo are already participants in a climate risk consortium formed by the Risk Management Association that began work in September 2021. The group, which has grown to consist of 33 financial institutions, seeks to develop standards for banks to integrate climate risk management throughout their operations.
Like other U.S. regulators under the Biden administration, the Fed is paying close attention to climate change and how financial institutions are confronting the matter. The agency is working with its counterparts at the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation to provide guidance to large banks on expectations for measuring, monitoring, and managing climate-related risks.
“As our nation, and the world, grapple with how to respond to climate change, banks are increasingly focused on the risks that climate change brings to their balance sheets,” said Fed Vice Chair for Supervision Michael Barr in a speech earlier this month. “… The Federal Reserve’s mandate in this area is important, but narrow, focused on our supervisory responsibilities and our role in promoting a safe and stable financial system.”