The Board of Governors of the Federal Reserve System (FED) announced a pilot climate scenario analysis exercise for six largest banks in the U.S. The pilot exercise, which is designed to enhance the ability of supervisors and firms to measure and manage climate-related financial risks, will be launched in early 2023 and is expected to conclude around the end of the year.
The participating banks are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo. FED will publish, at the beginning of the pilot exercise, details of the climate, economic, and financial variables that make up the climate scenario narratives. Over the course of this pilot exercise, participating banks will analyze the impact of the scenarios on specific portfolios and business strategies. FED will then review analyses of firms and engage with them to build capacity to manage climate-related financial risks. FED expects that publishing insights gained from the climate scenario analysis exercise at an aggregate level will help identify potential risks and promote risk management practices. The pilot is not expected to have any capital or supervisory implications. By considering a range of possible future climate pathways and associated economic and financial developments, scenario analysis could assist firms and supervisors in understanding how climate-related financial risks may manifest and differ from historical experience. In coming months, FED will provide additional details on how the exercise will be conducted and the scenarios that will be used in the pilot exercise.
Scenario analysis—in which the resilience of financial institutions is assessed under different hypothetical climate scenarios—is an emerging tool to assess climate-related financial risks. Climate scenario analysis is distinct and separate from bank stress tests. The stress tests from FED 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, however, is exploratory in nature and does not have capital consequences.
Related Link: Press Release
Keywords: Americas, US, Banking, Climate Change Risk, ESG, Scenario Analysis, Climate Scenarios, Basel, FED
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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