U.S. Fed gives banks until July to complete climate change risk assessment

Jan. 17 (UPI) -- The U.S. Federal Reserve is giving the country's six largest banks until the end of July to illustrate how climate change could negatively affect their portfolios.

The Fed outlined its pilot climate scenario analysis exercise in a document issued Tuesday.

The program's aim is to better assess climate risk management practices and, eventually, be able to do so on a continual basis. Banks will need to explain how their real estate investment portfolios will stand up to specific risks brought on by climate change, such as worsening heat waves and wildfires, or stronger hurricanes and resulting floods.

The Fed's board of governors is using a fictional scenario in the Northeastern United States to see how banks' differing commercial and residential real estate portfolios are affected.

"The Fed has narrow, but important, responsibilities regarding climate-related financial risks -- to ensure that banks understand and manage their material risks, including the financial risks," Vice Chair for Supervision Michael Barr said in a statement Tuesday.

"The exercise we are launching today will advance the ability of supervisors and banks to analyze and manage emerging climate-related financial risks."

Another part of the program looks at financial risks a bank's portfolio faces as the country moves towards its goal of achieving net zero greenhouse gas emissions by the year 2050. The Fed terms that portion "transition risks."

The ultimate goal is "to ensure that supervised institutions are appropriately managing all material risks, including financial risks related to climate change," the Fed said in a statement.

Tuesday's pilot program has been in the works for three years. It is separate from financial stress tests banks routinely perform to see how their assets would be negatively affected in a recession.

Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo are the six institutes taking part in the program.

Written submissions are due at the end of July and will be released before the end of the year, although some specific details will be withheld.