The FED announced a pilot climate scenario analysis exercise for early 2023

Thu 13 Oct 2022

The Federal Reserve Board (FED) will commence its first bottom-up climate scenario analysis exercise at the beginning of 2023, as announced on 29 September. The exercise will be exploratory in nature and will not result in extra capital requirements. The list of designated participants consists of six of the largest U.S. banks, i.e., Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.

Overview

The format of the exercise is expected to resemble the Bank of England’s Climate Biennial Exploratory Exercise conducted in 2021 and the European Central Bank’s Climate Stress Test of 2022. At the start of the exercise, the FED will share a set of climate scenario narratives with predefined macro-financial and climate variables and initial shocks. In the next stage, banks are expected to analyse the scenario pathways, translate the shocks, and assess the impacts on their portfolios and business strategies. Subsequently, the banks will share their findings with the FED. Later in 2023, the FED will review the analysis and engage with banks to bolster the capacity to manage climate-related financial risks.

The FED is expected to conclude the exercise with a report consisting of insights gained from the exercise at an aggregate level, reflecting what has been learned about climate risk management practices at the largest banks, and how insights from scenario analysis will help identify potential risks and promote risk management practices. The FED affirms that no firm-specific information will be released.

Additional details on the exercise and scenarios will be shared later this year.

Further remarks

Although the list of participating banks has been limited by the FED, the U.S. and international banking industry is advised to follow the pilot exercise and incorporate the methodological considerations, if made public, into their climate-related and environmental risk management frameworks and internal scenarios.

References:

Federal Reserve Board – Federal Reserve Board announces that six of the nation’s largest banks will participate in a pilot climate scenario analysis exercise designed to enhance the ability of supervisors and firms to measure and manage climate-related financial risks