WASHINGTON — According to a statement from the agency, the Federal Reserve Board said Thursday that six of the nation’s top banks will engage in a pilot climate scenario analysis exercise meant to strengthen the ability of supervisors and corporations to measure and manage climate-related financial risks.
Scenario analysis, in which the resilience of financial institutions is evaluated under several hypothetical climate scenarios, is an emerging tool for assessing climate-related financial risks, and the pilot will have no impact on capital or supervision.
The pilot exercise will commence at the beginning of 2023 and is anticipated to conclude by the end of the year. The Board will publish the climate, economic, and financial variables that comprise the climate scenario narratives at the outset of the exercise.
During the duration of the pilot, the participating firms will assess the impact of the scenarios on their respective portfolios and business strategies. The Board will then assess corporate analyses and work with those firms to develop their capacity to handle financial risks associated to climate change. The Board plans to produce a summary of the pilot’s insights, which will reflect what has been learnt about climate risk management methods and how insights from scenario analysis will assist in identifying potential threats and promoting risk management practices. No company-specific details will be disclosed.
The examination of climate scenarios is distinct and distinct from bank stress tests. The purpose of the Board’s stress tests is to determine whether large banks have sufficient capital to continue lending to individuals and companies during a severe economic downturn. The climate scenario analysis effort, on the other hand, is exploratory and has no financial implications. By analyzing a range of potential future climatic pathways and corresponding economic and financial developments, scenario analysis can help enterprises and regulators comprehend how climate-related financial risks may materialize and differ from historical experience.
Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo are participating in the pilot project. In the following months, the Board will give additional information regarding the conduct of the exercise and the scenarios that will be utilized in the pilot.