Fed Summarizes Bank Pilot Climate Scenario Analysis Exercise  

May 14, 2024

On May 9,
the Federal Reserve (Fed) released a summary of the 2023 pilot climate scenario analysis it conducted with Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase; Morgan Stanley, and Wells Fargo. The summary did not provide details about individual banks.

The pilot exercise aimed to understand large banks’ climate risk-management practices and enhance their ability to estimate, monitor, and manage climate-related financial risks.

It comprised two separate and independent modules, a physical risk module and a transition risk module:

  • The physical risk module focused on estimating the effect of specific scenarios on residential and commercial real estate loan portfolios over a one-year horizon in 2023. (All banks assessed the impact of a severe hurricane in the Northeast region on their residential and commercial real estate portfolios.)
  • The transition risk module focused on estimating the effect of specific scenarios on corporate and CRE loan portfolios over a 10-year horizon from 2023–32.

According to the Fed:

“The exercise highlighted data gaps and modeling challenges that arise when estimating the financial impact of highly complex and uncertain risks over various time horizons.” 

Specifically, the Fed found that participants:

  • Had significantly different approaches to the exercise due to different business models, views on risk, access to data, and prior participation in climate scenario analysis exercises in foreign jurisdictions;
  • Used existing credit models to estimate the impact of climate-related risks on credit risk parameters, with some banks suggesting that models could be enhanced to better capture climate transmission channels and associated impacts;
  • Faced data challenges, including gaps related to real estate exposures, insurance, obligors’ transition risk management, and infrastructure;
  • Noted the importance of understanding insurance market dynamics when modeling the impact of physical risk hazards on credit exposures; and
  • Worked with third-party vendors, with some noting that the lack of historical data and the proprietary nature of vendor models inhibited their ability to independently assess model performance.

When the Fed announced the pilot exercise in 2022, Republican lawmakers expressed concern that regulators might try to use climate analyses to direct banks toward or away from specific activities.

However, the report stated that:

“The pilot CSA exercise was exploratory in nature and does not have consequences for bank capital or supervisory implications. The Federal Reserve neither prohibits nor discourages financial institutions from providing banking services to customers of any specific class or type, as permitted by law or regulation. The decision regarding whether to make a loan or to open, close, or maintain an account rests with the financial institution, so long as the financial institution complies with applicable laws and regulations.”

Please contact Sairah Burki (sburki@crefc.org) with any questions. 


Sairah Burki
Managing Director, Head of Regulatory
Affairs & Sustainability
The information provided herein is general in nature and for educational purposes only. CRE Finance Council makes no representations as to the accuracy, completeness, timeliness, validity, usefulness, or suitability of the information provided. The information should not be relied upon or interpreted as legal, financial, tax, accounting, investment, commercial or other advice, and CRE Finance Council disclaims all liability for any such reliance. © 2023 CRE Finance Council. All rights reserved.

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