NEW YORK – Major U.S. financial institutions are participating in a pilot testing program that the Federal Reserve hopes will determine exposure and develop effective responses to increased risks from a changing climate.
Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo are all expected to provide responses to the Federal Reserve Board by July 31.
Similar to stress tests developed after the 2008 financial crisis, scenarios for risks related to climate change could determine stability in the event of major impacts.
"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," Vice Chair for Supervision Michael S. Barr said in a statement. "The exercise we are launching today will advance the ability of supervisors and banks to analyze and manage emerging climate-related financial risks."
Financial stability will be tested against frequent disasters, long-term risks and human responses to such threats.
"For transition risks, banks will consider the impact on corporate loans and commercial real estate portfolios using a scenario based on current policies and one based on reaching net zero greenhouse gas emissions by 2050," the Federal Reserve Board stated.
Financial experts said many of the larger banking institutions are in the early stages of model development for climate-related risks, but challenges remain in determining the validity of outcomes.
The Federal Reserve said it hopes that a better understanding of the organizations’ climate risk-management practices emerges from the pilot program.
The National Oceanic and Atmospheric Administration reports major disasters since 1980 have produced more than $2.475 trillion in damage, with the majority of damage occurring during the past decade.
In 2022, 18 disasters were reported by NOAA to have losses that exceeded $1 billion each and ranged from droughts and fires to severe weather outbreaks and hurricanes.
December’s arctic blast that produced record cold temperatures as far as Florida and historic snow along the eastern Great Lakes is the last official reported billion-dollar disaster in the U.S., but it is widely expected that damage estimates from California’s atmospheric rivers will propel the disaster to become the country’s most recent.
Regulators plan to release insights from the analysis but said firm-specific information will be withheld to protect confidentiality.