According to the Daily News on May 19 on the website of Scientific American, an analysis report released by the Federal Reserve highlighting the growing impact of climate change on the U.S. financial system shows that a strong hurricane in the northeastern United States may trigger a wave of bank loan defaults on Wall Street. This is a prediction based on the data provided by the bank itself.
Last year, the Federal Reserve for the first time asked six major investment banks in the United States to test their ability to simulate and withstand a series of climate change impacts and prospects (including extreme hurricanes, fires and floods, and the rapid abandonment of fossil fuels).
The Federal Reserve announced the test results on the afternoon of the 9th. The 46 page document summarizes the information provided by JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley and Citigroup.
The report clarifies the impact of natural disasters and clean energy transformation on the banking industry, including the increase in loan default probability. For example, the report points out that a "serious" hurricane in the northeastern United States in 2050 may affect nearly half of all residential loans of five banks in the region.
However, the analysis report did not provide in-depth information on how banks prepared for different situations and the severity of this threat.
However, it gives us a glimpse of the complexity of building models for future natural disasters and clean energy transition, and what they mean for the world's largest banks.
In the report, the Federal Reserve said that, in addition to reducing the difficulty for banks and regulators to determine, monitor and solve climate risk, its core goal is to "understand the practices and challenges of large banking institutions in managing climate risk".
A few years ago, advocates of climate change took the lead in calling on financial regulators to consider the possibility of climate change disrupting the US financial system. Later, the Biden government also supported this.
President Biden signed an executive order in 2021, requiring the government to address the financial threat posed by climate change. This prompted a committee composed of the highest financial regulator to issue a report, recommending that all members (including the Federal Reserve) conduct climate related scenario analysis.
The Federal Reserve's decision to move in this direction was opposed by Republican lawmakers, who believed that financial regulators had no right to intervene in climate issues. They also accused the Federal Reserve of trying to use financial supervision to bring down the oil and gas industry.
Federal Reserve officials have repeatedly stressed that scenario analysis activities will not have an impact on banks in terms of supervision, and the Federal Reserve cannot and will not decide which industry banks will conduct business with. The report said: "The Federal Reserve will neither prohibit nor dissuade financial institutions from providing banking services to any specific category or type of customers permitted by laws or regulations." (Compilation/Zheng Guoyi)
