WASHINGTON–Six of the nation's largest banks will participate in a pilot climate scenario analysis exercise designed to enhance the ability of supervisors and firms to measure and manage climate-related financial risks, according to the Federal Reserve, which will be conducting the 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, and there will be no capital or supervisory implications from the pilot, the Fed said.
The pilot exercise will be launched in early 2023 and is expected to conclude around the end of the year. At the beginning of the exercise, the Fed said it will publish details of the climate, economic, and financial variables that make up the climate scenario narratives.
“Over the course of the pilot, participating firms will analyze the impact of the scenarios on specific portfolios and business strategies,” the Federal Reserve said in a statement. “The Board will then review firm analysis and engage with those firms to build capacity to manage climate-related financial risks. The board 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 risk management practices. No firm-specific information will be released.”
Not a Stress Test
According to the Federal Reserve, 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 Fed explained. “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.”
Participating banks in the pilot include Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.
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