On September 29, 2022, the Board of Governors of the Federal Reserve System (“Federal Reserve”) announced that it would conduct a climate scenario analysis exercise with six of the largest US banking organizations.1 This appears to be similar to, but more involved than, the climate risk management survey that the Office of the Comptroller of the Currency recently conducted with certain large US banks.2 Similar climate scenario analysis exercises have been undertaken by other banking regulators, including in France.3 Also, the Financial Stability Board has recommended climate scenario analysis as a key tool for banks and regulators to address financial risks arising from climate change.4
The brief announcement states that the exercise will be a pilot program that is intended to help the Federal Reserve and the six organizations measure and manage climate-related financial risks. The Federal Reserve will provide climate scenario narratives to the organizations, which they will use to analyze the impact of various scenarios on specific portfolios and business strategies.5 The results of these analyses will be reviewed by the Federal Reserve and discussed in the context of the supervisory relationship with each organization.
The details of the climate, economic, and financial variables that make up the climate scenario narratives will be released publicly, as will aggregate insights that the Federal Reserve develops from the exercise. Information that is specific to individual organizations will not be released.
The announcement emphasizes that scenario analysis is different from stress testing because scenario analysis is exploratory in nature and does not have capital consequences. This is consistent with the approach taken by the Basel Committee on Banking Supervision, which does not require climate-related stress testing and recognizes that climate-related stress testing is expected to mature.6 The announcement also may be intended to address industry concerns that climate-related stress testing is only in early developmental stages.7
The announcement does not state the Federal Reserve’s authority to conduct this type of exercise or indicate if it is mandatory. Given that only six organizations will participate in the exercise and will do so under the auspices of the bank supervision process, the Federal Reserve may not be required to publicly disclose the type of information that one would typically see in a notice-and-comment rulemaking or information collection review.8 However, if the Federal Reserve were to expand the exercise to a broader set of banking organizations, we expect it would need to clearly articulate a legal basis for doing so and address both public comments and congressional oversight concerns. Therefore, particularly given recent caselaw regarding the validity new wide-ranging regulatory initiatives, this exercise may remain limited in scope or voluntary in nature for the foreseeable future.9
1 Press Release, “Federal Reserve Board announces that six of the nation’s largest banks will participate in a pilot climate scenario analysis exercise designed to enhance the ability of supervisors and firms to measure and manage climate-related financial risks” (Sept. 29, 2022).
2 See our Legal Update “US OCC Extends Climate Risk Survey” (Jan. 20, 2022).
3 See our Legal Update “The Results Are In! France's ACPR Publishes Report of 2020 Pilot Climate Risk Assessment (aka Stress Test) for Participating French Banks and Insurers” (May 6, 2021).
4 See our Legal Update “FSB Releases Report on Approaches to Climate-Related Risks” (May 9, 2022).
5 See our Legal Update “Network for Greening the Financial System Issues Second Iteration of Climate Scenarios” (June 14, 2021).
6 See our Legal Update “Climate Risk Management Principles Finalized by Basel Committee” (June 23, 2022).
7 E.g., Am. Bankers Assoc., Climate Change and Banking (Feb. 9, 2022).
8 See OMB, About the PRA (“Some of the more common exemptions to PRA include: Requesting from fewer than 10 people”); Randal Quarles, Thoughts on the Evolution of Bank Supervision (Dec. 11, 2020) (“the vast majority of the communication about the bank supervision process takes place confidentially”).
9 See our Legal Update “Supreme Court Decision Casts Doubt on SEC’s Climate Proposal and Other Regulatory Initiatives” (July 12, 2022).