The Federal Reserve on Tuesday asked the six largest US banks to gather data on how their businesses would be affected by “a range of plausible future outcomes” related to climate change and the transition to a lower-carbon economy in what it considered a pilot effort. to ensure that the financial system is prepared for the risks posed by global warming.
The scenario analysis, including estimates of how real estate portfolios could be affected by “physical risk” and how corporate lending could be affected by the transition to a net-zero carbon economy by 2050, “are neither forecasts nor guidelines,” the US central bank said. “They do not necessarily represent the most likely future results.”
Instead, the analysis is intended to “build understanding of how certain climate-related financial risks may manifest” in terms of changes in the likelihood of loan defaults, losses and internal risk assessments.
“The Fed has narrow but important responsibilities regarding climate-related financial risks — to ensure that banks understand and manage their material risks, including the financial risks from climate change,” Fed Vice President for Supervision Michael Barr said in a statement.
“The exercise we are launching today will advance the ability of regulators and banks to analyze and manage emerging climate-related financial risks,” he said.
The 52-page set of instructions requests responses by July 31 from Bank of America, Citigroup, Goldman Sachs Group, JPMorgan Chase, Morgan Stanley and Wells Fargo.
The Fed said it would publish a summary of the results around the end of 2023, and would not disclose any bank-specific findings.
‘EXCELLENT IN NATURE’
The climate analysis is separate from the “stress tests” that the Fed carries out as part of the supervision of the banks to see if they have enough capital to cover losses in the event of an immediate economic shock.
In contrast, the climate analysis is a more tentative step described by the Fed as “exploratory in nature” and without any “bank capital or supervisory implications.”
Still, it represents a move into controversial territory.
Some members of Congress, particularly Republicans, have urged the Fed to avoid climate policy, and Fed Chair Jerome Powell has responded – as recently as last week – by insisting that the central bank has no plans to use its authority to shape credit decisions or try. to steer investments away from, for example, the fossil fuel industry.
At the same time, Fed officials say their responsibility for the stability of the financial sector requires recognizing and preparing for the risks posed over time by warmer temperatures, more volatile weather and the potential disruptions involved in a transition away from fossil fuels.
Even that notion has attracted opposition. When the US central bank last month published a broad set of guidelines for large banks on climate risk reduction, Fed Governor Chris Waller dissented on the grounds that climate change does not pose a financial stability risk and that the usual stress tests already show banks. are resilient.
However, other central banks have taken steps to better understand the risks involved. The Bank of England published its first climate scenario analysis of the UK financial system last year, assessing both insurers and banks for risk exposure to the physical threats of climate change and to stresses during the expected transition to net zero carbon emissions in the coming decades. The European Central Bank published its own test scheme for climate scenarios last year.