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    FED Issues Further Details on Pilot Climate Scenario Analysis Exercise

    The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies. The participating banks are Bank of America Corporation, Citigroup Inc, The Goldman Sachs Group Inc, JPMorgan Chase & Co, Morgan Stanley, and Wells Fargo & Company.

    The pilot exercise comprises two separate and independent modules: a physical risk module and a transition risk module. For both the physical and transition risk modules, FED will describe forward-looking scenarios to participating large banking organizations, including core climate, economic, and financial variables, where appropriate. The pilot exercise includes physical risk scenarios with different levels of severity affecting residential and commercial real estate portfolios in the Northeastern United States and directs each bank to consider the impact of additional physical risk shocks for their real estate portfolios in another region of the country. For transition risks, banks will consider the impact on corporate loans and commercial real estate portfolios using one scenario based on current policies and one based on reaching net zero greenhouse gas emissions by 2050. These scenarios are not forecasts or policy prescriptions but can be used to build an understanding of climate-related financial risks. 

    The pilot climate scenario analysis includes a range of plausible future outcomes that can help build an understanding of how certain climate-related financial risks could manifest for large banking organizations and how these risks may differ from the past. Participants will estimate the effect of these scenarios on a relevant subset of their loan portfolios over a future time horizon. For each loan, participants will calculate and report credit risk parameters, such as probability of default, internal risk rating grade, and loss given default, as appropriate. Participants will respond to qualitative questions describing their governance, risk-management practices, measurement methodologies, results for specific portfolios, and lessons learned. The six banking organizations will submit completed data templates, supporting documentation, and responses to the qualitative questions to FED by July 31, 2023.

    FED anticipates publishing insights gained from the pilot at an aggregate level, reflecting what has been learned about climate risk management practices and how insights from scenario analysis will help identify potential risks and promote effective risk management practices. FED expects to publish the insights by the end of 2023 and does not intend to release any firm-specific information. In selecting scenarios for this exercise, FED leveraged existing work conducted by the Intergovernmental Panel on Climate Change (IPCC) and the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).


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    Keywords: Americas, US, Banking, Climate Change Risk, ESG, Scenario Analysis, Stress Testing, Basel, FED

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