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Financial Services Law Insights and Observations

Fed announces climate scenario exercises

Bank Regulatory Federal Issues Federal Reserve Climate-Related Financial Risks Risk Management

On January 17, the Federal Reserve Board provided additional details regarding its upcoming pilot climate scenario analysis exercise and the information on risk management practices that will be gathered from the program. As previously covered by InfoBytes, the Fed announced in September 2022, that six of the nation’s largest banks will participate in a pilot climate scenario analysis exercise intended to enhance the ability of supervisors and firms to measure and manage climate-related financial risks. According to the Fed, the banks will analyze the impact of scenarios for both physical and transition risks related to climate change on specific assets in their portfolios. The Fed noted that it will collect qualitative and quantitative information during the pilot, including details on governance and risk management practices, among other things. Additionally, the banks will be asked to consider the effect on corporate loans and commercial real estate portfolios using a scenario based on current climate policies and one based on reaching net-zero greenhouse gas emissions by 2050. The Fed noted that though no firm-specific information will be released, it anticipates publishing insights at an aggregate level, reflecting what has been learned about climate risk management practices and how insights can identify possible risks and promote risk management practices.

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