The Federal Reserve announced on Thursday that six of the country’s biggest banks will participate in a pilot climate risk analysis exercise set to begin next year.
The pilot program is a big move for the central bank, which has faced pressure from the Left to focus more on climate change even as it has faced pressure from Republicans to avoid climate policy. The banks that will take part in the pilot are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.
The exercise is set to begin early next year and conclude by the end of 2023. Scenario analysis will be used to examine the resiliency of financial institutions under different hypothetical climate scenarios, similar to an effort already being undertaken by European regulators.
“Over the course of the pilot, participating firms will analyze the impact of the scenarios on specific portfolios and business strategies. The Board will then review firm analysis and engage with those firms to build capacity to manage climate-related financial risks,” the Fed said in a news release.
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The central bank plans to publish the insights gained through the pilot exercise at an aggregate level, while no firm-specific data will be released to the public. The Fed made the point of highlighting that its climate scenario analysis is distinctly 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 Fed said. “The climate scenario analysis exercise, on the other hand, is exploratory in nature and does not have capital consequences.”
Michael Barr, the Fed’s vice president of supervision, first disclosed the plans for the pilot program in a speech in Washington, D.C., earlier this month. While offering little in the way of details, Barr said the “pilot micro-prudential scenario analysis exercise” would be conducted to “better assess the long-term climate-related financial risks facing the largest institutions.”
A priority for Democrats has been to better track the relationship between major financial firms and the environment. The pilot program seems to be a step toward the government more closely examining the risks that climate change could present to banks, although it doesn’t go as far as some on the Left would like in actually regulating firms on the matter.
News of the climate risk analysis pilot was met with derision from some Republicans who see it as an entry for the Fed to regulate firms as it relates to climate change. Sen. Pat Toomey (R-PA), the ranking member of the Banking Committee, called it the “first step toward pressuring banks into limiting loans to and investments in traditional energy companies.”
“There is no risk from global warming that banks aren’t already fully capable of pricing into their decisions, and the Fed’s intrusion into this process only underscores that the real risk is government,” Toomey said. “The real purpose of this program is to ultimately produce new regulatory requirements. While the Fed can call this pilot program by whatever name it may prefer, it sounds exactly like a stress test to me.”
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During his confirmation hearing, Barr was careful to point out that he sees the central bank’s role in accelerating the transition to a lower carbon economy as “quite limited [and] narrow.”
“I think the Federal Reserve is not able to allocate credit [and] should not be in the business of telling financial institutions to lend to a particular sector or not to lend to a particular sector,” he testified earlier this year.
