The news: The Federal Reserve will conduct a 2023 climate-related scenario analysis pilot in which six major banks will participate, per Banking Dive.
Exploratory analysis: The study will begin in early 2023 and conclude around the end of next year. Participants include Bank of America, JPMorgan Chase, Citi, Morgan Stanley, Goldman Sachs, and Wells Fargo.
- Before the pilot starts, the Fed will outline the scenarios it will test, including climate, economic, and financial variables.
- Results from the study will be published in aggregate when the pilot ends. Firm specific details will not be published.
The study seeks to provide insight into how firms can measure and manage climate-related financial risk. The pilot is exploratory and separate from the annual stress tests that the Fed conducts, and it won’t impact capital requirements.
An emerging trend? The pilot resembles the climate-related scenario analysis that the European Central Bank (ECB) conducted, along with its biennial bank stress testing earlier this year.
- Those tests evaluated how banks would hold up through various scenarios, and consisted of three modules: a questionnaire on banks’ capacity to conduct the climate stress tests; a comparative analysis on the sustainability of the banks’ business models and their exposure to companies that produce the most emissions; and a bottom-up stress test.
With the US conducting similar tests—further details will be released in the coming months—we could see these scenarios becoming a larger part of bank stress testing globally.