Federal Reserve outlines bank pilot climate scenario exercise

The Federal Reserve Board has outlined the initial steps of a pilot climate scenario analysis exercise involving six of the nation’s largest banks.

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Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo will participate to enhance the ability of supervisors and firms to measure and manage climate-related financial risks.

Through the effort, the resilience of financial institutions is assessed under different hypothetical climate scenarios, officials noted, adding scenario analysis serves as a tool to assess climate-related financial risks.

The pilot exercise, expected to begin in early 2023 and conclude around the end of the year, will involve participating firms analyzing the impact of the scenarios on specific portfolios and business strategies, according to officials.

The Federal Reserve Board will review firm analysis and engage with the firms to build capacity to manage climate-related financial risks, with officials noting the Board anticipates publishing insights at an aggregate level, reflecting what was learned about climate risk management practices and how insights from scenario analysis would aid in identifying potential risks while and promoting risk management practices.

The Federal Reserve Board noted it would provide additional details in the coming months on how the exercise will be conducted and the scenarios that will be used in the pilot.