Fed enlists six major banks for climate risk analysis

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The Federal Reserve announced Thursday it has enlisted six of the nation's largest banks to participate in a climate risk analysis set to launch next year with the aim of assessing the institutions' resilience "under different hypothetical climate scenarios."

The banks in the pilot exercise are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.

The Federal Reserve announced six of the largest U.S. banks will participate in a new climate risk analysis slated to begin next year. (AP Photo/Patrick Semansky, File/Associated Press / AP Images)

The Fed said in a press release that the analysis will differ from bank stress tests that assess whether major financial institutions have enough capital to continue lending in the instance of a severe recession, noting that the climate scenario analysis "is exploratory in nature and does not have capital consequences."

"By considering a range of possible future climate pathways and associated economic and financial developments, scenario analysis can assist firms and supervisors in understanding how climate-related financial risks may manifest and differ from historical experience," the statement reads.

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The announcement did not provide examples of the type of scenarios that will be tested, but said further details would be released in coming months. 

This is the first time an assessment of climate-related financial risk will be conducted by the Fed, which has faced pressure from the political left to take up climate priorities.

Federal Reserve Chairman Jerome Powell (AP Photo/Manuel Balce Ceneta / AP Images)

The central bank's climate initiative comes as inflation continues to rage in the U.S. amid a contracting economy, but climate activists say the move is long overdue.

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Phillip Basil, director of banking policy at advocacy group Better Markets, issued a statement following the Fed's announcement, calling the move "a welcome first step in addressing the urgent need to mitigate climate related financial risks," but adding that the central bank should have conducted it before.

"To date the Fed has woefully lagged behind many of its European counterparts in conducting climate scenario analysis, which is key to identifying, sizing and assessing the risks that climate change poses to the financial system," Basil wrote. 

The move could result in additional regulations for the banking industry.

The Board of Governors announced a new climate risk assessment pilot Thursday with six major U.S. banks. (Al Drago/Bloomberg via Getty Images / Getty Images)

The Bank Policy Institute, which represents several large banks, published an article Thursday saying that "central banks and supervisors have been evaluating climate-related financial risks to banks focusing on physical and transition risks" for years, and that the evidence suggests fears over large lending institutions' vulnerabilities due to climate change may be overblown.

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"These official sector efforts have resulted in a myriad of climate risk management proposals by supervisors, numerous climate scenario analysis exercises and a host of disclosure requirements across jurisdictions," the BPI article states. "This of course would all be appropriate if climate-related financial risk is a financial stability risk or material bank safety and soundness risk; however, over the past year the results of more research and practical analysis undertaken through climate scenario analysis calls into question whether such risks are material and in fact suggests that the near-term risks are entirely manageable for large banks."

FOX Business' Tyler Kendall and Reuters contributed to this report.

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