U.S. banks face significant data and modeling challenges in predicting the impact of climate change on their loan books, the Federal Reserve said on Thursday 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 modeling.
“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 (BAC.N), opens new tab, Citigroup (C.N), opens new tab, Goldman Sachs (GS.N), opens new tab, JPMorgan Chase (JPM.N), opens new tab, Morgan Stanley (MS.N), opens new tab and Wells Fargo (WFC.N), opens new tab.
Spokespeople for Morgan Stanley and Citigroup declined to comment. Representatives for the other banks did not immediately respond to requests for comment.
Banks addressed both potential losses from hurricanes and other natural disasters, and the impacts of changing policies.
The European Central Bank (ECB) and Bank of England (BoE) have also directed banks to do climate risk analysis in recent years.
Some industry experts argue climate risks could imperil trillions of dollars of assets, but others question whether currently available research shows climate change posing a severe immediate threat to bank stability in the same way that a recession could.
Unlike stress tests the Fed carries out to see if banks can keep lending in a downturn, this exercise will not affect capital requirements.
Fed Chair Jerome Powell has said the central bank will not try to use policy for climate goals, and should stick to managing risks to the banking system.
This contrasts with the ECB and BoE, where officials say they want to support the energy transition and both have said banks should act to manage climate risks. Both central banks have published estimates of the potential costs, opens new tab of environmental policies and weather events.
The Fed did not provide estimates of how much money banks might lose.
A confidential document prepared by Citigroup as part of the exercise showed a relatively small hypothetical hit to the bank’s books, Reuters
reported this month.
