On January 17, 2023, the Board of Governors of the Federal Reserve System released detailed instructions for ts pilot climate scenario analysis exercise. The pilot is geared towards learning about the climate risk management practices and challenges faced by large banks, with the goal of enhancing the ability of large banks and supervisors to identify, monitor and manage climate-related financial risks.
Six U.S. banks will participate in this pilot exercise: Bank of America Corporation; Citigroup Inc.; The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; Morgan Stanley; and Wells Fargo & Company. These large banking organizations have material corporate and real estate portfolios and have made significant investments in their climate-related, risk-management capacity.
The pilot exercise comprises two independent modules: (1) a physical risk module, and (2) a transition risk module.
Physical risks refer to the harm to people and property arising from acute, climate-related disaster events, such as hurricanes, wildfires, floods, heatwaves, and droughts, and chronic shifts in climate, including higher average temperatures, changes in precipitation patterns, sea level rise, and ocean acidification. The pilot focuses on estimating the effect of specified physical risk scenarios on residential real estate and commercial real estate loan portfolios over a one-year 2023 horizon.
Transition risks refer to stresses to certain institutions or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes that would be part of a transition (or not) to a lower carbon economy.The pilot focuses on estimating the effect of specific scenarios on corporate loans and commercial real estate loans over a 10-year horizon from 2023-32. Two scenarios, basically: (1) no changes scenario and (2) a net zero 2050 scenario
The Federal Reserve leveraged on IPCC Intergovernmental Panel on Climate Change reports, such as the Sixth Assessment Report, and the NGFS Network of Central Banks and Supervisors for Greening the Financial System to prescribe specific forward-looking climate scenarios used in the modules. The pilot exercise focuses on the effect of the climate scenarios on certain loan portfolios but will not cover their trading books.
Participants are required to submit completed data templates, supporting documentation and responses to qualitative questions to the Federal Reserve by July 31, 2023. Click on the image below to access the document, including great references.
