The Federal Reserve Board offered more details this week on how its pilot climate scenario analysis exercise for large banks will be conducted.
The pilot exercise includes physical risk scenarios with different levels of severity impacting residential and commercial real estate portfolios in the Northeastern United States. It directs the six largest banks to consider the impact of additional physical risk shocks for their real estate portfolios in another region of the country. For transition risks, banks will consider the impact on corporate loans and commercial real estate portfolios using one scenario based on current policies and one scenario based on reaching net zero greenhouse gas emissions by 2050.
“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,” Vice Chair for Supervision Michael Barr said. “The exercise we are launching today will advance the ability of supervisors and banks to analyze and manage emerging climate-related financial risks.”
To support the goals of deepening understanding of climate risk-management practices and building capacity to identify, measure, monitor, and manage climate-related financial risks, the Fed will gather qualitative and quantitative information over the course of the pilot. This includes details on governance and risk management practices, measurement methodologies, risk metrics, data challenges, and lessons learned.
The board intends to publish 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 specific information on any bank will be released.
The climate scenario analysis is completely separate from annual bank stress tests, which are designed to assess whether large banks have enough capital to continue lending during a severe recession.