(Reuters) – New York Federal Reserve researchers have developed an approach to measure banks’ exposure to climate-related risks, a possible first step in assessing whether financial institutions have enough capital to do so. face.
The publication on Friday of an article describing the new methodology could mark a first step towards a possible “climate stress test” for US banks. It’s an approach already used by other global central banks, but one that has drawn strong criticism from Republican U.S. lawmakers who say monitoring such a risk is beyond the remit of the central bank.
For his part, Fed Chairman Jerome Powell said he believes making sure banks are resilient to the threat of climate change is clearly part of the Fed’s mandate.
Friday’s paper, titled simply “Climate Stress Testing,” describes for the first time exactly how the Fed could test the vulnerability of banks and the financial system to shocks as the country strives to limit trapping carbon dioxide emissions. the heat.
“Banks that provide finance to fossil fuel companies are expected to suffer when the risk of default on their loan portfolios increases, as economies shift to a low-carbon environment,” the researchers said. “While banks systematically incur substantial losses as a result of a sharp increase in physical risks or transition risks, climate change poses considerable risk to the financial system.
The researchers developed a metric to assess climate risk and found that for some banks heavily exposed to fossil fuels, it was “economically substantial”.
Using Citigroup as an example, the researchers said the expected amount of capital the bank would have had to raise under the climate stress scenario to restore a prudential capital ratio increased by $ 73 billion in 2020, at one point. where oil prices were falling as the pandemic reduced demand for energy.
A Citigroup spokeswoman declined to comment on the newspaper.
Overall, measures of banking risk for large banks in the United States, United Kingdom, Japan, Canada and France tended to rise and fall over time, but at the same time they have found.
The researchers did not take into account the direct effects of climate-related weather events, although they said integrating such risks could be a next step.
U.S. banking regulators, including the Fed, are already set to demand more disclosure of how weather-related risks could affect bank asset values.
(Reporting by Ann Saphir; Editing by Andrea Ricci)