WASHINGTON, D.C.— Dennis Kelleher, Co-founder, President and CEO, issued the following statement in connection with the Federal Reserve Board’s (Fed) announcement of the results from its climate scenario analysis exercise.
“The results from the Fed’s pilot climate scenario are appalling and alarming. These results don’t just reveal innocuous sounding ‘data gaps’ and ‘modeling challenges.’ They reveal deep and broad deficiencies in basic risk analysis and management at Wall Street’s six largest too-big-to-fail banks, and grossly deficient regulation, management, and preparation to deal with those risks.
“The Fed’s refusal to require banks to properly address and plan for the many obvious, well-known, and growing risks from climate borders on dereliction of its duty to ensure the safety, soundness, and stability of the banking system. The Fed is supposed to be a risk regulator regardless of the source of the risk, but a fear of being accused of being a climate policymaker or climate regulator has caused it to abdicate its responsibilities. The Fed simply must stop caving to the fossil fuel industry, its allies, and sympathizers and being bullied into ignoring known serious risks to the banking industry, the financial system, the economy, and all Americans.
“The pilot results show that the banks tested had significant data and modeling challenges when attempting to simply estimate their climate risk for an ‘exploratory’ test. Furthermore, most of the banks had to rely on third parties because they had serious gaps in information needed for the pilot exercise, including real estate exposures and insurance information. That is extremely troubling given there is a banking crisis coming behind the current worsening climate-caused insurance crisis. These very basic deficiencies are shocking and inexcusable because banks are already required to measure and monitor all relevant risks, no matter the source, and the Fed is supposed to make sure that they do. The Fed and the banks are both egregiously failing here.
“Additionally, the Fed pilot itself was also far too limited: it applied to just six of the largest banks in the country, and the Fed only released aggregate descriptions of the results. Because there is no information on the individual banks tested, it is impossible for the public to know how deficient the banks were or the validity of the aggregate descriptions.
“The Fed must act now to (1) require the six banks to immediately address the very basic risk management and data weaknesses revealed in the test results, (2) expand the climate scenario analysis to include all of the large banks that are part of the annual supervisory stress test, (3) incorporate identified climate-related financial risks into banks’ overall supervisory assessments and ratings to ensure the banks are appropriately addressing the risks, (4) broaden the scope of coverage for future tests to other types of physical and transition risks, and to other loan portfolios, and (5) partner with other regulators in the US and around the world to expand, strengthen, and standardize climate data so that banks are able to accurately measure and monitor climate risk.”
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