The six largest banks in the country have been instructed by the Federal Reserve, the country’s central banking system, to compile information on the anticipated impact that climate change events like hurricanes, wildfires, floods, heat waves, and droughts would have on their business operations.
The banks have until July 31 to submit the details of the projected impact.
According to a statement from Federal Reserve Vice Chair for Supervision Michael S. Barr, “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.”
To ensure that the American financial system is prepared for the various risks posed by the climate crisis, the Federal Reserve referred to the review as a “pilot exercise.”
According to CNBC, the Fed’s analysis considers both the “transitions risks” of moving to a net-zero carbon economy by 2050 as well as “physical risk,” or the damage to people and property from unforeseen climate events.
Banks like Citigroup, JPMorgan Chase, Goldman Sachs, Wells Fargo, and Bank of America provided the data for the analysis.
The participating banks are required to explain what would happen to their commercial and residential real estate loan portfolios if a major hurricane struck the Northeast under the Federal Reserve’s fictitious scenario. Additionally, they are required to conduct the same assessment with a different climate event in a different region of the United States, according to Reuters.
Another part of the exercise requires the banks to assess the effects of two scenarios—one in which a net-zero transition is achieved by 2050 and the other in which fossil fuel use continues—on their lending portfolios for commercial and corporate real estate over the next ten years.
According to the U.S. central bank, the analysis “[does] not necessarily represent the most likely future outcomes,” but is intended to “build understanding of how certain climate-related financial risks could manifest,” according to Reuters.
A summary of the bank’s findings would be released, according to the Fed, around the year’s end.
Barr stated in the press release that “the exercise we are launching today will advance supervisors’ and banks’ ability to analyse and manage emerging climate-related financial risks.”
According to Reuters, Better Markets President and CEO Dennis Kelleher called the exercise a “weak start.” “It’s a step. Something is better than nothing… They should be covering 100% of every area where the biggest risks come from.”
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The Chenab Times News Desk
