Six Major Banks Join Fed Pilot Program to Improve Climate Risk Analysis

Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo have agreed to participate in a Federal Reserve Board pilot program that is intended to improve the ability to measure and manage climate-related financial risks.

Under the program, the banks will conduct climate scenario analysis that will assess the resilience of financial institutions under different hypothetical climate scenarios. The Federal Reserve Board described the program as an “emerging tool” to assess climate-related financial risks and said there will be no capital or supervisory implications from the pilot.

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The exercise is slated to launch in early 2023 and be completed by the end of next year. The Fed said that it will publish details of the climate, economic, and financial variables that will make up the climate scenario narratives at the beginning of the exercise.

During the pilot, the banks will analyze the impact of various climate-related scenarios on specific portfolios and business strategies. The Fed will then review the analysis and engage with the banks to determine ways to manage climate-related financial risks. It said it expects to publish insights gained from the program to reflect what has been learned about climate risk management practices and how that will help identify potential risks and promote risk management practices. However, it said that no firm-specific information will be released.

The board noted that climate scenario analysis differs from bank stress tests in that stress tests assess whether banks have enough capital to lend to households and businesses during a severe recession, while climate scenario analysis 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,” the Fed said in a statement. It added that it will provide further details on how the pilot exercise will be conducted and the scenarios that will be used.

In a speech last month at the Brookings Institution in Washington, D.C., Michael Barr, the board’s vice chair for supervision, said the Federal Reserve is working to understand how climate change may pose risks to individual banks and to the financial system.

“Banks are increasingly focused on the risks that climate change brings to their balance sheets,” he said. “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.”

He said that the Federal Reserve intends to work with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to provide guidance to large banks on how they are expected to identify, measure, monitor, and manage the financial risks of climate change.