With the U.S. Federal Reserve Board planning to embark on a climate scenario analysis exercise with six major Wall Street banks, it appears that climate-related financial risk is finally climbing its way up the U.S. regulatory agenda, says Fitch Ratings.
Last week, the Fed unveiled plans for a pilot exercise to examine the possible effects of different climate change scenarios on the businesses of six big banks — Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.
While the Fed indicated that the exercise won’t have capital implications for the banks, Fitch Ratings indicated in a research note that the exercise could benefit banks’ credit profiles by uncovering gaps in their data collection and risk governance.
The report said the exercise will likely lead to climate scenario analysis being adopted “as a key tool in bank risk management frameworks.”
At the same time, Fitch noted the exercise will also build the expertise of U.S. regulators on climate-related risks, saying the Fed “has lagged other developed markets” in this area.
“The Fed’s efforts are directionally in line with other banking jurisdictions,” it said, noting that regulators in Canada, Europe, the UK and Hong Kong have undertaken similar projects.
“Aggregate findings and insights of the exercise will not likely be available until 2024 and could be used to tailor future regulation, although firm-specific results will not be disclosed,” Fitch said.
In the meantime, other regulators’ work appears poised to start impacting the banking sector.
Notably, the European Central Bank’s climate stress test “highlighted the extent to which lending books remain tilted toward high-emission corporate sectors.” The Bank of England is also expected to incorporate the results of its latest climate stress test into future regulatory capital requirements.