The US Federal Reserve has released details for its first climate scenario analysis exercise for the six largest US banks.
According to ESG Today, the exercise is designed to assess the banks’ climate-related risk management practices and their resilience to a range of climate outcomes. Results from the exercise are to be submitted by the banks by the end of July 2023.
The banks taking part in the climate scenario exercise include Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.
According to the Fed, the goals of the exercise include generating a deeper understanding of climate risk management practices at the banks, and building capacity to identify, measure, monitor, and manage climate-related financial risks.
The banks will examine the effects of two climate scenarios on specific areas of their loan portfolios. The scenarios, based on those provided by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), include one based on current policies and one based on reaching net zero greenhouse gas emissions.
The exercise will include two separate modules, with each explore the key risk areas of physical risk and transition risk.
Firstly, the physical risk module will examine the impact of potential future shocks arising from harm to people and property from acute climate-related events such as hurricanes, wildfires, floods, and chronic events such as higher temperatures and rising sea levels on the banks’ real estate portfolios.
The transition risk module will assess the impact on corporate loans and commercial real estate portfolios from the transition to a lower carbon economy, including shifts in policy, consumer and business sentiment, or technologies.
Fed vice chair for supervision Michael Barr said, “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. The exercise we are launching today will advance the ability of supervisors and banks to analyze and manage emerging climate-related financial risks.”
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