The Federal Reserve — the central banking system of the U.S. — has told the six largest banks in the country to put together data on the anticipated effect climate change events like wildfires, floods, heat waves, droughts and hurricanes would have on their business operations.
The banks have until July 31 to provide the projected impact information.
“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,” Federal Reserve Vice Chair for Supervision Michael S. Barr said, according to a press release from the Board of Governors of the Federal Reserve System.
The Federal Reserve called the review a “pilot exercise” to make sure the U.S. financial system is ready for the various risks presented by the climate crisis.
The Fed’s analysis looks at “physical risk” — the harm to people and property from unforeseen climate events — as well as the “transitions risks” of moving to a net-zero carbon economy by 2050, reported CNBC.
Banks providing data for the analysis include Citigroup, JPMorgan Chase, Goldman Sachs, Wells Fargo and Bank of America.
Under the Federal Reserve’s hypothetical scenario, the participating banks are asked to demonstrate what would happen to their commercial and residential real estate loan portfolios if a serious hurricane hit the Northeast. They are also asked to conduct the same assessment with an additional climate event of their choice in a separate part of the U.S., Reuters reported.
In another part of the exercise, the banks are asked to evaluate the 10-year impacts on their commercial and corporate real estate lending portfolios in a scenario where a net-zero transition is achieved by 2050 and one in which fossil fuel use carries on.
The U.S. central bank said the analysis is meant to “build understanding of how certain climate-related financial risks could manifest,” but “[does] not necessarily represent the most likely future outcomes,” reported Reuters.
The Fed said a summary of the bank’s findings would be published around the end of the year.
“The exercise we are launching today will advance the ability of supervisors and banks to analyze and manage emerging climate-related financial risks,” Barr said in the press release.
President and CEO of Washington, DC, nonprofit Better Markets Dennis Kelleher called the exercise a “weak start,” reported Reuters. “It’s a step. Something is better than nothing… They should be covering 100% of every area where the biggest risks come from.”
The climate evaluation is different from the normal oversight the Federal Reserve conducts through its “stress tests,” which check to see if the central bank has enough capital in case of a sudden, unexpected economic event.
“Climate scenario analysis is distinct and separate from bank stress tests. The Board’s stress tests are designed to assess whether large banks have enough capital to continue lending to households and businesses during a severe recession. The pilot climate scenario analysis exercise, on the other hand, is exploratory in nature and does not have capital consequences,” the press release said.
While Federal Reserve Chair Jerome Powell has said the central bank doesn’t intend to use its authority to influence credit decisions or attempt to influence investment in the fossil fuel industry, central bank officials have said it is their responsibility to acknowledge and prepare for risks presented by potential climate change events like severe weather and increasing temperatures, as well as possible disruptions caused by the transition to green energy, Reuters reported.