The U.S. Federal Reserve Board is set to launch a pilot climate scenario analysis with six large banks, aimed at assessing the resilience of the financial institutions to various climate scenarios, and enhancing the ability of supervisors and firms to measure and manage climate-related financial risks.
Participating banks include Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.
The Fed’s exercise comes at a time when central bankers globally are increasing the use of stress tests to assess the resilience of banking and financial systems to climate-related risks.
For example the European Central Bank (ECB) and Bank of England (BoE) recently released results from their own climate stress tests.
The ECB said there was an urgent need for banks to accelerate the incorporation of climate risk into their risk management frameworks and finding significant exposure to emissions-heavy industries,
Meanwhile, the BoE noted that banks and insurers will likely to be able to absorb the transition and physical costs of climate change, but will face significant financial headwinds.
Under the Fed’s new exercise, the banks will analyse the impact of scenarios encompassing a series of climate, economic, and financial variables.
The US central bank will review the banks analyses, engage with the firms to build climate risk management capacity, and publish aggregate-level insights from the pilot.
The pilot scheme follows the release late last year of a report by the U.S. Financial Stability Oversight Council (FSOC),which includes the Federal Reserve as a member.
It identified climate change as an emerging and increasing threat to the U.S.’ financial stability, and calling on federal agencies to take action to address the threat.
The council’s key recommendations included using scenario analysis to assess climate-related financial risks to financial stability, and evaluating the need for new regulations to account for these risks.
