Fedโ€™s Climate Risk Assessment Exercise Will Include Impact on Banksโ€™ CRE Portfolios

Federal ReserveThe Fed released new details this week about its “pilot climate scenario analysis”—an exploratory exercise that will require six major banks to report by July 31 on how extreme weather event scenarios would impact their operations, investments and real estate portfolios. (Reuters, Jan. 17 and Politico PowerSwitch, Jan. 19)

Risk Scenarios & CRE

  • The pilot exercise aims to learn about climate risk-management practices and challenges of the six largest U.S. banks—and enhance their ability to identify, measure, monitor, and manage climate-related financial risks.
  • The banks will analyze the impact of two risk scenarios on corporate and CRE lending exposures in their portfolios, according to the Fed’s 52-page set of instructions for Bank of America, Citigroup, Goldman Sachs Group, JPMorgan Chase, Morgan Stanley and Wells Fargo. (Fed news release, Jan. 17)
  • One scenario will include how storms, floods and other “physical risks” could affect residential and commercial real estate portfolios in northeast over a one-year horizon.
  • The second scenario will focus on “transition risks,” which refers to financial stresses caused by regulations and market forces that compel shifts to a lower carbon economy. The banks will analyze impacts over a 10-year horizon, using a scenario based on current policies—and one based on reaching net zero greenhouse gas emissions by 2050. (Yahoo News and Fed Participant Instructions, Jan. 17)

What’s Next

Federal Reserve's 2023 pilot climate scenario analysis

  • The Fed plans to publish a summary of its climate scenario analyses by the end of 2023.

  • Banks will calculate and report to the Fed on credit risk parameters such as probability of default, internal risk rating grade, and loss given default.
  • The Fed’s climate exercises are different from bank stress tests, since these climate risk scenarios are exploratory in nature and have no capital consequences. (Fed Participant Instructions, Jan. 17)
  • The central bank’s exercises come as various federal agencies are taking action on risks that climate change may pose to the economy.
  • The Securities and Exchange Commission (SEC) is expected to issue climate disclosure regulations from by April. The proposed rules would require all registered companies to disclose material financial risks related to climate change, and may include new disclosure requirements for “Scope 3” GHG emissions. The Roundtable submitted extensive comments last year on the SEC’s about the proposal. (Roundtable Weekly, June 10)
  • The Federal Insurance Office within the Treasury Department has also requested information on climate-related financial risks from the insurance sector to identify geographic areas that might lack coverage. (ClimateWire, Jan. 18 and Federal Register, August 31, 2021)

Climate-related regulatory proposals affecting CRE will be among the topics discussed during The Roundtable’s Jan. 24-25 State of the Industry Meeting in Washington, DC.

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