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Fed directs big banks to disclose how they are preparing for climate change risks

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The Federal Reserve building is seen before the Federal Reserve board is expected to signal plans to raise interest rates in March as it focuses on fighting inflation in Washington, January 26, 2022.

Joshua Roberts | Reuters

The six largest banks in the U.S. have until the end of July to show the impact that climate change could have on their operations, according to details of a pilot program the Federal Reserve unveiled Tuesday.

Under the review, the institutions are to show the anticipated impact that events such as floods, wildfires, hurricanes, heat waves and droughts could have on their loan portfolios and commercial real estate holdings. A hypothetical scenario focuses on events in the Northeastern U.S.

Though the two exercises bear similarities, the climate scenario tests are considered separate from mandated bank stress tests that examine readiness in the case of financial and economic crises.

“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 from climate change,” Fed Vice Chair for Supervision Michael S. Barr said. “The exercise we…

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