The Federal Reserve has published the results of its pilot climate scenario analysis exercise, providing the first public summary of how six of the largest banking organisations in the United States are assessing and managing the financial risks associated with climate change. The publication, released on 9 May 2024, marks a meaningful step in the Fed's effort to understand climate-related exposures across the institutions it supervises and to bring the United States into alignment with the supervisory practices already established in major international jurisdictions.
The exercise examined how the participating banks — whose individual identities were not disclosed in the aggregate published results — approach both physical risks, such as property damage and disruption caused by extreme weather events, and transition risks arising from the economy's shift towards lower-carbon energy sources and production methods. The Fed was explicit that the pilot was an exploratory exercise designed to build analytical understanding rather than a stress test, and that no prescriptive capital requirements would flow directly from the results.
BANKS SHOW NASCENT BUT DEVELOPING CAPABILITIES
The published findings indicated that the six institutions had developed nascent but progressing capabilities for identifying and managing climate-related financial risks. Data availability emerged as the most consistently cited challenge, with banks reporting difficulty in obtaining the granular, forward-looking emissions data and physical asset exposure information necessary to model climate risks with confidence. The methodologies used to translate climate scenarios into financial loss estimates also vary significantly across institutions and remain at an early stage of standardisation relative to the frameworks used in conventional credit and market risk modelling.
The summary noted that banks are making meaningful investments in their climate risk infrastructure, including the establishment of dedicated governance structures, the creation of scenario planning teams, and the acquisition of specialist data and analytical tools. The Fed observed that the sophistication of these capabilities varies across the participating institutions and across different business lines within each bank, with wholesale lending and real estate finance emerging as the areas where climate risk quantification is most actively developing.
SUPERVISORY CONTEXT AND IMPLICATIONS
The climate scenario analysis pilot is part of a broader convergence in climate risk supervision across major economies. Regulators in the United Kingdom, the European Union, Australia, and Canada have already conducted comparable exercises, and the Fed's publication narrows the gap between US supervisory practice and international norms. The Fed has consistently emphasised that its approach is about identifying and understanding risk rather than mandating specific climate-related capital allocations or prescribing transition strategies for individual firms, a distinction that has been important in managing political sensitivities around the topic in the United States.
The findings are expected to inform the Federal Reserve's ongoing supervisory dialogue with large banks on climate risk without triggering immediate changes to capital frameworks or stress testing methodology. Industry participants are likely to use the aggregate findings to benchmark their own programmes, while the publication increases the expectation that climate-related disclosures and risk management capabilities will be a standard element of supervisory engagement with the largest US institutions in the years ahead. The exercise has also prompted banks to invest in the underlying data infrastructure and analytical talent needed to run credible climate risk models, laying foundations that will be built upon in any future, more formal assessment processes.