- US banks face significant data and modelling challenges in predicting the impact of climate change on their loan books.
- In recent years, the European Central Bank (ECB) and the Bank of England (BoE) have also directed banks to conduct climate risk analyses.
US banks face significant data and modelling challenges in predicting the impact of climate change on their loan books, the Federal Reserve said after its first analysis on the issue.
In the exercise undertaken over several months in 2023, the central bank aimed to understand how lenders would manage the risks of rising temperatures and changing external policies.
They found a wide range of approaches, the report said. In many cases, the lenders relied on external vendors to fill in gaps in data and modelling. “Participants suggested that climate-related risks are highly uncertain and challenging to measure,” the report said.
The participating banks were the country’s biggest: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.
Banks addressed potential losses from hurricanes and other natural disasters and the impacts of changing policies. In recent years, the European Central Bank (ECB) and the Bank of England (BoE) have also directed banks to conduct climate risk analyses.
Some industry experts argue climate risks could imperil trillions of dollars of assets, but others question whether current research shows climate change poses a severe immediate threat to bank stability in the same way that a recession could.
Fed Chair Jerome Powell has said the central bank will not use policy to achieve climate goals and should instead focus on managing risks to the banking system.
This contrasts with the ECB and BoE, where officials say they want to support the energy transition. Both have said banks should act to manage climate risks. Both central banks have published estimates of environmental policies and weather events.