The Federal Reserve announced Thursday it has enlisted six of the nation's largest banks to participate in a climate risk analysis set to launch next year with the aim of assessing the institutions' resilience under different hypothetical climate scenarios. Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo are among the banks involved in the pilot exercise.
The Fed said in a press release that the analysis will differ from bank stress tests that assess whether financial institutions have enough capital to continue lending in the event of a severe recession, noting that climate scenario analysis is exploratory in nature and does not have capital consequences. The statement states that scenario analysis can assist firms and supervisors in understanding how climate-related financial risks may manifest and differ from historical experience by considering a range of possible future climate pathways and associated economic and financial developments.
The announcement didn't give examples of the types of scenarios that will be tested, but said further details would be released in the coming months.
This is the first time that an assessment of climate-related risk will be conducted by the Fed, which has faced pressure from the political left to take up climate priorities.
The central bank's climate initiative comes as inflation continues to rage in the U.S. amid a contracting economy, but climate activists say the move is long overdue.
According to a statement issued by the Fed after the announcement, Phillip Basil, director of banking policy at advocacy group Better Markets, said the move was a welcome first step in addressing the urgent need to mitigate climate related risks, but added that the central bank should have conducted it before.
The Fed has lagged behind many of its European counterparts in conducting climate scenario analysis, which is essential to identifying, sizing and assessing the risks that climate change poses to the financial system, according to Basil.
The banking industry could be affected by the move, which could result in additional regulations for the industry.
The Bank Policy Institute, which represents several large banks, published an article Thursday saying that central banks and supervisors have been looking at climate-related risks to banks for years, and that there is evidence that large lending institutions' vulnerabilities may be overblown due to climate change.
The BPI article states that the official sector efforts have resulted in a myriad of climate risk management proposals by supervisors, numerous climate scenario analysis exercises and a host of disclosure requirements across jurisdictions. Over the past year, the results of more research and practical analysis undertaken through climate scenario analysis have suggested that the near-term risks are entirely manageable for large banks, and that this would be appropriate if climate related risk is a financial stability risk or material bank safety and soundness risk.