A new directive for the six largest U.S. banks to compile data on how their businesses would be impacted by climate change outcomes and the transition to a lower-carbon economy in what it called a pilot effort to ensure the financial system is prepared for the risks posed by global warming have been issued by the Federal Reserve on Tuesday.
The U.S. Central Bank has indicated that the scenario analysis should not be seen as forecasts or policy prescriptions as they do not represent the most likely future outcomes even though it includes estimates of how real estate portfolios might be affected by physical risk and how corporate lending might be affected by the transition to a net-zero carbon economy by 2050.
Instead, the analysis should be to help “build an understanding of how certain climate-related financial risks could manifest” in terms of changes in the likelihood of loan defaults, losses, and internal risk assessments.
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“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,” Fed Vice Chair for Supervision Michael Barr said in a statement.
The 52-page set of instructions asks for responses by July 31 from Bank of America (BAC.N), Citigroup (C.N), Goldman Sachs Group (GS.N), JPMorgan Chase (JPM.N), Morgan Stanley (MS.N) and Wells Fargo (WFC.N).
The Fed said it would publish a summary of the results towards the end of 2023, and would not disclose any bank-specific findings.
The pilot assessment is for banks to map out what would happen to their residential and commercial real estate loan portfolios in the event of a severe hurricane in the Northeast, as well as a second climate shock of their choosing in another part of the country.
A second module of the pilot requires banks to analyze the 10-year impacts on their corporate and commercial real estate lending books under two different “transition” scenarios — one where fossil fuel use continues, and the other where energy use is transitioned to zero-carbon output by 2050.
Story was adapted from Reuters.
