On January 17, 2023, the Federal Reserve Board provided additional details on how its pilot climate scenario analysis exercise will be conducted and the information on risk management practices that will be gathered over the course of the exercise. In a previous blog, we wrote about the Board announcing that it will conduct a pilot climate scenario analysis exercise designed to enhance the ability of supervisors and firms to measure and manage climate-related financial risks.
Based on the Participants Instructions issued by the Federal Reserve Board, the six largest U.S. banks will analyze the impact of scenarios for using two separate and independent modules: a physical risk module and a transition risk module. For each module, the Board will describe forward-looking physical or transition risk scenarios, while each participant will estimate the effect of these scenarios on a relevant subset of credit exposures. The physical risk module will focus on estimating the effect of specific scenarios on residential real estate and commercial real estate loan portfolios within a stretch of one year (2023). The transition risk module will focus on estimating the effect of specific scenarios on corporate loan and CRE loan portfolios over a 10-year timeline, that is from 2023 to 2032.
The Board will collect qualitative and quantitative information over the course of the pilot, including details on governance and risk management practices, measurement methodologies, risk metrics, data challenges, and lessons learned. The Board will then publish insights gained from the pilot at an aggregate level, reflecting what has been learned about climate risk management practices and how insights from scenario analysis will help identify potential risks and promote effective risk management practices.
Read the FRB’s press release here.
The Participant Instructions can be found here.