The Federal Reserve Building is seen ahead of the Federal Reserve Board signaling its intention to raise interest rates in March as it focuses on fighting inflation in Washington, D.C. January 26, 2022.
Joshua Roberts | Reuters
The six largest U.S. banks have until the end of July to show the impact climate change could have on their operations, according to details of a pilot program the Federal Reserve unveiled on Tuesday.
As part of the review, institutions must show the expected impact that events such as floods, wildfires, hurricanes, heat waves and droughts could have on their loan portfolios and real estate assets. commercial. A hypothetical scenario focuses on events in the northeastern United States
Although the two exercises have similarities, the climate scenario tests are considered distinct from the mandatory bank stress tests that examine preparedness in the event of a financial and economic crisis.
“The Fed has narrow but important responsibilities regarding climate-related financial risks – to ensure that banks understand and manage their material risks, including financial risks related to climate change,” said the vice chairman of the Fed. Fed for Oversight, Michael S. Barr. “The exercise we are launching today will strengthen the ability of supervisors and banks to analyze and manage emerging climate-related financial risks.”
The analysis lasts at least three years.
A report on financial stability at the end of 2020 first discussed the possibility of the Fed examining how prepared the institutions it oversees are for the economic impacts of climate change. This came a year after the Fed Vice Chairman Lael Brainard first raised the issue.
However, President Jerome Powell recently promised the central bank would not become a “climate maker” despite the efforts of the new program.
The analysis takes a two-pronged approach, examining a “physical risk” perspective, or the damage to people and property caused by unexpected climate-related events, and the “transition risks” associated with the costs of transitioning to a zero-emission economy by 2050.
Participating banks include Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo. The deadline for submissions is July 31, and a summary is expected to be made public by the end of the year, but will not include information on specific bank responses.
The report released Wednesday did not outline a more specific scenario that banks should address. However, he said it would involve looking at the impact on residential and commercial property portfolios of “risk scenarios with varying levels of severity” affecting the North East.
In addition, banks are asked to “consider the impact of additional physical risk shocks to their real estate portfolios in another region of the country”.
The transition risk part is to focus on how corporate lending and commercial real estate would be affected by the decision to achieve net zero greenhouse gas emissions by 2050.
The final report will focus on aggregate information provided by banks on how they incorporate climate risks into their financial plans. There will be no estimates of the total potential losses from hypothetical events.