Federal Reserve’s Pilot Climate Scenario Exercise Falls Short

WASHINGTON, D.C. — The Board of Governors of the Federal Reserve today released details on its pilot climate scenario analysis exercise. Six of the largest U.S. banks—Bank of America Corp., Goldman Sachs Group Inc, JPMorgan Chase & Co., Morgan Stanley, Wells Fargo & Co. and Citigroup Inc,—will take part in an exercise meant to provide insight on each financial institutions exposure to physical and transition risks posed by climate change. 

Anne Perrault, finance policy counsel with Public Citizen’s Climate Program, issued the following statement: 

“As currently designed, the scenario exercises announced by the Federal Reserve will understate the risks these major banks face from climate change. These banks face threats that are only getting worse as record-breaking extreme weather events become commonplace and new climate-related policies and technologies transform our economy. 

“Unfortunately, the exercises capture only a portion of the total risks, for example, not capturing  possible macroprudential contagion triggered by major hurricanes or a rapid low-carbon transition. They look at only portions of a bank’s portfolio, even though climate risk affects every sector, not just real estate and corporate loans. The scenarios the Fed relies on for considering transition risk are also overly reliant on carbon offsets and understate the need for banks to stop investing in fossil fuels to avoid transition shocks and align their businesses with their public commitments. 

“While scenario exercises can be useful for helping banks and regulators understand the risks banks face, the Fed must be very explicit about the sharp limitations of the exercises it has outlined. 

“The uncertainty associated both with scenario analysis and with climate-related risks means that regulators should apply a precautionary approach to the results – with a margin of conservatism in line with the recommendations from the Basel Committee on Banking Supervision on assessing climate-related losses.” 

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