On September 29, 2022, the Federal Reserve Board announced that six of the nation's largest banks will participate in a pilot climate scenario analysis exercise designed to enhance the ability of supervisors and firms to measure and manage climate-related financial risks. Scenario analysis is an emerging tool to assess climate-related financial risks, and there will be no capital or supervisory implications from the pilot. The banks in the pilot exercise are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.
A scenario analysis is an exercise in which the resilience of financial institutions is assessed under different hypothetical climate scenarios. A scenario analysis is different from bank stress tests, which are designed to assess whether large banks have enough capital to continue lending to households and businesses during a severe recession. The pilot exercise will be launched in early 2023 where the Board will publish details of the climate, economic, and financial variables that make up the climate scenario narratives. During the course of the pilot exercise, participating firms will analyze the impact of the scenarios on specific portfolios and business strategies. The Board will then review firm analysis and engage with those firms to build capacity to manage climate-related financial risks.
At the end of the scenario analysis, the Board is expected to publish insights gained from the pilot at an aggregate level, including what has been learned about climate risk management practices and how insights from scenario analysis will help identify potential risks and promote risk management practices.
The Federal Board’s announcement can be found here.