NO STRESS — Expectations are low for the Federal Reserve's first foray into assessing the financial risks of climate change. The U.S. central bank is in the process of gauging six major banks’ approach to preparing for the economic realities of a warming world, Avery Ellfeldt reports for POLITICO's E&E News. As part of that effort, the Fed is developing a “pilot climate scenario analysis” that will test those lenders’ ability to model — and then handle — a variety of climate-related events, such as a major hurricane strike in the northeastern United States or a future with robust climate laws. What it's not doing: Trying to assess the banks' actual exposure to climate risks, or how much money they might lose under various scenarios. “This is the Fed engaging in an extremely narrow exercise,” said Sarah Bloom Raskin, a Duke University law professor, former deputy Treasury secretary and Fed Board member whom President Joe Biden also nominated to serve as the central bank’s vice chair for supervision last year but withdrew after opposition from Republicans and Sen. Joe Manchin (D-W.Va.). European banks have already gone further in climate stress testing. The European Central Bank last year asked 104 banks to submit detailed information about their capabilities, and 41 of the largest lenders to conduct a modeling exercise to estimate their overall losses under different climate scenarios. And the ECB used a maximum 30-year time horizon, compared to the Fed's 10-year scope. The key question going forward, Bloom Raskin said in an email, is whether the Fed will “step up this so-called climate scenario analysis from a weak, six-bank-only pilot into a supervisory tool that is realistic and credible.” Most observers acknowledge that the goal of the exercise is to understand banks’ capacity to assess climate risks — rather than to quantify climate risk itself — and say the exercise would provide helpful information along those lines. They also acknowledge the tight political tightrope the Fed is walking to avoid Republicans' wrath. But there's still criticism from some corners. In an op-ed last week, two experts with the University of Maryland and another with Connecticut-based Conning Asset Management Co. highlighted what they see as the biggest problem: that models used by the Fed and other central banks to draw a line between global temperature rise and economic outcomes are underdeveloped, oversimplistic and likely to yield inaccurate results. For that reason, they argued, the exercise “may be one of futility.”
| 
