Energy & Environment

Fed announces pilot program on climate risk with six major banks

FILE – An American flag flies over the Federal Reserve building on May 4, 2021, in Washington. The nation’s 33 biggest banks have enough capital to withstand a severe economic contraction, the Federal Reserve said Thursday, June 23, 2022. In its latest annual “stress tests” of the U.S. financial system, the Fed built a scenario under which the nation’s unemployment rate would more than double to 10%, and a severe contraction in commercial real estate and stock market values would cause losses of more than $600 billion. (AP Photo/Patrick Semansky, File)

The Federal Reserve Board will enlist six major U.S. banks in a pilot climate risk analysis program, officials announced Thursday

Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo will participate in the pilot as part of the Federal Reserve’s attempt to determine the financial risk associated with natural disasters and climate change. The exercise will have no consequences to capital, and while data from its findings will be published, none of the banks will be identified by name. 

The analysis, set to begin in 2023, will be distinct from the “stress tests” the central bank uses to determine whether financial institutions have sufficient capital to loan during major recessions, according to the announcement. 

“The climate scenario analysis exercise, on the other hand, is exploratory in nature and does not have capital consequences. By considering a range of possible future climate pathways and associated economic and financial developments, scenario analysis can assist firms and supervisors in understanding how climate-related financial risks may manifest and differ from historical experience,” the Fed board said in its announcement. 

The announcement was expected, with Fed Vice Chairman of Supervision Michael Barr announcing the pilot exercise September 7.  

“The Federal Reserve is working to understand how climate change may pose risks to individual banks and to the financial system,” Barr said in a speech at the Brookings Institution. “The Federal Reserve’s mandate in this area is important, but narrow, focused on our supervisory responsibilities and our role in promoting a safe and stable financial system.” 

Although international financial institutions are in broad agreement on the need for such analysis, it has caught the ire of congressional Republicans, who have accused the Fed of exceeding its mandate.

Earlier this year, the Biden administration withdrew the nomination of Sarah Bloom Raskin as vice chairwoman for banking supervision at the Federal Reserve Board of Governors after her views on climate policy led Sen. Joe Manchin (D-W.Va.) to decline to back her. 

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