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The largest six banks in the United States have been given until July to show the Federal Reserve what effects disastrous climate change scenarios could have on their bottom lines.
Noting the risks could be “material,” the Fed said the banks will have to show how their finances fare under a number of climate stress tests, including heat waves, wildfires, floods and droughts, according to details of a new Fed pilot program released on Tuesday.
“The pilot exercise includes physical risk scenarios with different levels of severity affecting residential and commercial real estate portfolios in the Northeastern United States and directs each bank to consider the impact of additional physical risk shocks for their real estate portfolios in another region of the country,” wrote the Fed.
The Federal Reserve first announced the pilot program in September, noting that Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo would participate.
Climate activists said that the project was long overdue (Federal Reserve Chair Jerome Powell has been questioned about it multiple times over the last year), and that other central banks are far ahead of the Fed on climate risk assessments. The Bank of England ran a similar exercise in 2021.
They also said the proposal lacked any real teeth. In its announcement the Federal Reserve stressed that the exercise “is exploratory in nature and does not have capital consequences.” It also said that it would not publish individual banks’ results.
San Francisco Federal Reserve President Mary Daly told CNN in October Thursday that this was a learning and exploratory exercise for the Federal Reserve. It would be “incredibly premature to jump to the conclusion that any new policies or programs would come out of it,” she said.
The other side: Critics of the pilot program have argued that the Federal Reserve was overstepping its boundaries and that they might soon begin to enforce financial penalties.
“The Fed’s new ‘pilot’ program is the first step toward pressuring banks into limiting loans to and investments in traditional energy companies and other disfavored carbon-emitting sectors,” wrote former Republican Senator Pat Toomey, then a ranking member of the Senate Banking Committee. “The real purpose of this program is to ultimately produce new regulatory requirements.”
Powell said last week that the central bank would not become a “climate policymaker.”
“Today, some analysts ask whether incorporating into bank supervision the perceived risks associated with climate change is appropriate, wise, and consistent with our existing mandates,” Powell said last Tuesday. “In my view, the Fed does have narrow, but important, responsibilities regarding climate-related financial risks. These responsibilities are tightly linked to our responsibilities for bank supervision. The public reasonably expects supe …