Federal Reserve Climate Scenario Analysis Results: Unpacking Banks’ Preparedness in Managing Climate Risk


May 14, 2024

The Federal Reserve conducted a pilot climate scenario analysis (CSA) exercise in 2023, asking six of the top US banks (Bank of America Corporation; Citigroup Inc; The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; Morgan Stanley; and Wells Fargo & Company) to participate. The aim was to understand the participants’ climate risk-management practices and challenges and to enhance their ability to identify, estimate, monitor, and manage climate-related financial risks.

The Fed CSA pilot involved both a transition and a physical risk module. Banks estimated the climate impacts on corporate, commercial real estate, and residential loans. The exercise shed light on banks’ governance, climate data challenges, existing framework limitations, and risk exposure estimations. Areas of focus included: analyses across various time horizons, chronic risks, indirect impacts, insurance dynamics, scenario design, and risk management capabilities.

Key takeaways

Transition Risk Module
  • Participants used a combination of macroeconomic variables from the NGFS scenarios, baseline emissions data, and their own internal assumptions as a part of their credit risk modeling
  • Participants faced significant challenges in modeling the macroeconomic and sectoral implications of different transition pathways, relying on third-party vendors’ climate frameworks, databases, and proxies to complete analyses
  • Translating climate impact into climate-adjusted credit risk parameters (e.g. PD/LGD) required a scenario analysis framework that extended down to the obligor-level in order to forecast climate-adjusted financials

Physical Risk Module
  • Participants assessed the risk of direct and indirect impacts from multiple physical perils across various regions using hazard estimates ranging from property to zip code-level
  • A range of internal and external data gaps were highlighted, requiring data from third-party vendors to estimate building characteristics, repair costs, and insurance premiums
  • Participants leveraged existing credit risk models to determine how physical shocks could affect credit risk parameters for individual loans

Our approach to measuring climate risk

It’s clear that climate scenario analysis is fundamental to translating transition and physical climate-related risks into financial impact at the portfolio and obligor level. Designing and building a climate scenario analysis framework requires robust data sets (internal and external), modeling capabilities, and subject matter expertise.

ON Climate enables banks to quantify climate impact through automated climate scenario analysis, leveraging banks’ internal data sets, NGFS assumptions, and our ONci climate database to overcome data challenges and existing framework limitations. Our solutions range from a climate risk scorecard to analyze risk concentrations to forecasted climate-adjusted financials at the obligor/property level to drive climate-adjusted credit risk parameters.

Understand climate risk in your portfolio today, by leveraging our climate risk scorecard.