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Federal Reserve’s Climate Scenario Analysis Exposes Struggles in Modeling Impact Climate Change Will Have on Banks

WASHINGTON, D.C. – The Federal Reserve yesterday released the results of a pilot climate scenario analysis it undertook with the six largest banks to build its own and the banks’ capacity to consider climate-related financial risks. The results from Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo showed that the banks faced significant challenges when it came to modeling these risks, partly due to lack of access to data, and they have yet to build out internal models of how climate change will impact their businesses. Mekedas Belayneh, policy advocate with Public Citizen’s Climate Program, issued the following statement: 

“Results of the Federal Reserve Board’s pilot climate-related exercise underscore just how difficult it is to measure highly uncertain climate-related financial risks, despite knowing many of the risks will materialize. The exercise was highly simplified and streamlined, yet it still exposed deep difficulties in measuring climate-related physical and transition risk to banks, let alone the systemic impacts climate change will have on the economy and financial system. Notably, banks also lack the critical information on the continued affordability and accessibility of insurance to manage losses from physical climate risk.

“The radical uncertainties and existential threat posed by climate change render traditional financial modeling frameworks inadequate to mitigate climate risk. The results from scenario analysis should be used in proportion to the confidence in their accuracy and not as a substitute for more effective regulatory tools. 

“As financial institutions advance modeling and data availability to make scenario analysis more decision-useful and aligned with climate science, the Federal Reserve should implement precautionary measures, such as transition plans, to mitigate the severe but difficult to model financial risks related to climate change. For future scenario exercises, we urge regulators to incorporate qualitative approaches to fill in modeling and data gaps and work with climate scientists in the design and review of scenarios to ensure models are aligned with climate science.”

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