Fed releases instructions on pilot climate scenario analysis involving 6 largest U.S. banks

Details on how this year’s pilot climate scenario analysis exercise with the six largest U.S. banks will be conducted were released by the Federal Reserve Board Tuesday in an instruction document for the participant institutions.

That document shows that six U.S. bank holding companies (BHCs) will participate in this pilot exercise: Bank of America Corporation; Citigroup Inc.; The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; Morgan Stanley; and Wells Fargo & Company.

“These six banking organizations will submit completed data templates, supporting documentation, and responses to qualitative questions to the Federal Reserve Board by July 31, 2023,” the booklet notes. The exercise, announced by the Fed Board in September, is expected to conclude around year-end.

“To support the exercise’s goals of deepening understanding of climate risk-management practices and building capacity to identify, measure, monitor, and manage climate-related financial risks, the Board will gather qualitative and quantitative information over the course of the pilot, including details on governance and risk management practices, measurement methodologies, risk metrics, data challenges, and lessons learned,” the Fed said in a release.

It said 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 that it 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, the Fed said, banks will consider the impact on corporate loans and commercial real estate portfolios using a 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, the Fed noted, but can be used to build understanding of 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 effective risk management practices. No firm-specific information will be released,” it said.

The board also noted that climate scenario analysis is “distinct and separate” from bank stress tests. The Fed 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, it noted, while the pilot climate scenario analysis exercise “is exploratory in nature and does not have capital consequences.”

Federal Reserve Board provides additional details on how its pilot climate scenario analysis exercise will be conducted and the information on risk management practices that will be gathered over the course of the exercise

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