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).
Related Links
Keywords: Americas, US, Banking, Climate Change Risk, ESG, Scenario Analysis, Stress Testing, Basel, FED
Featured Experts

James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
Previous Article
Dubai FSA Outlines Business Plan for 2023-2024Related Articles
FINMA Approves Merger of Credit Suisse and UBS
The Swiss Financial Market Supervisory Authority (FINMA) has approved the takeover of Credit Suisse by UBS.
BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks
The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
APRA Assesses Macro-Prudential Policy Settings, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) published an information paper that assesses its macro-prudential policy settings aimed at promoting stability at a systemic level.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
MFSA Sets Out Supervisory Priorities, Issues Reporting Updates
The Malta Financial Services Authority (MFSA) outlined its supervisory priorities for 2023
German Regulators Issue Multiple Reporting Updates for Banks
Deutsche Bundesbank published the nationally deactivated validation rules for the German Commercial Code (HGB) users on the taxonomy 3.2, which became valid from December 31, 2022
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.