News Release: Fed Releases Inadequate Inaugural Climate Test for Big Banks


January 18, 2022

William Pierre-Louis, Jr.
(347) 499-7874

Fed Releases Inadequate Inaugural Climate Test for Big Banks

WASHINGTON, D.C. — The Federal Reserve pilot climate scenario analysis to spur six major U.S. banks to evaluate their climate risks represents a necessary step towards getting these financial institutions to understand their transition risks and the severe physical threats on their residential and commercial real estate portfolios. But there needs to be a more assertive approach to how megabanks manage their climate risks.

“Rigorous climate scenario analysis must look beyond the limited scope of credit risks included here and should consider how physical and transition shocks are correlated rather than independent risks,” said Alex Martin, senior policy analyst at Americans for Financial Reform Education Fund. 

Climate scenario analysis is a critical analytic tool that banks and supervisors use to project future losses and manage risks posed by a changing climate and the necessary transition to a low-carbon economy. Based on the limited scenarios released, this inaugural effort will need to be more robust to accurately assess the level of risk and draw conclusions about the need for further regulatory intervention. 

“These climate scenarios also ignore the risk of financial contagion and cascading losses that could affect each of these banks,” said Martin. “The limitations of the Federal Reserve’s proposed exercise must be appropriately analyzed and communicated, and it must be significantly expanded or supplemented in the future.”