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The Big Bank Fed Climate Scenario Results Reveal Dangerous Risks and Grossly Deficient Regulation, Governance, and Preparation

WASHINGTON, DC – Dennis Kelleher, co-founder, president and CEO, released the following statement in connection with the Federal Reserve Board’s (Fed) announcement results from the analysis of climate scenarios.

results from the Fed’s pilot climate scenario they are terrifying and disturbing. These results don’t just reveal harmless-sounding “data gaps” and “modeling challenges.” They reveal deep and wide gaps in basic risk analysis and management at six of Wall Street’s largest too-big-to-fail banks, as well as grossly flawed regulation, governance and preparedness to deal with these risks.

“The Fed’s refusal to require banks to adequately address and plan for the many clear, well-known, and growing climate frontier risks has neglected their responsibilities to ensure the safety, soundness, and stability of the banking system. The Fed is supposed to act as a risk regulator regardless of the source of risk, but fear of being accused of being a policymaker or climate regulator has caused it to abdicate its responsibilities. The Fed simply must stop pandering to and being bullied by the fossil fuel industry, its allies and sympathizers into ignoring known serious threats to the banking industry, the financial system, the economy and all Americans.

“The pilot results show that the tested banks faced significant data and modeling challenges when simply trying to estimate their climate risk for an “exploratory” test. Moreover, most banks had to rely on third parties because they had major gaps in the information needed for the pilot, including real estate exposure and insurance information. This is extremely disturbing, considering that there is a so-called the banking crisis that is behind the current deepening climate-driven insurance crisis. These very basic shortcomings are shocking and inexcusable because banks are already required to measure and monitor all material risks, regardless of their source, and the Fed should ensure that this is the case. Both the Fed and the banks are failing miserably here.

“Additionally, the Fed pilot program itself was also far too limited: it involved only the six largest banks in the country, and the Fed only published summary descriptions of the results. Because there is no information about the individual banks tested, the public has no way of knowing how flawed these 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 issues and data weaknesses revealed by the test results, (2) expand the climate scenario analysis to include all large banks that are part of the annual supervisory conditions test. stressors, (3) integrating identified climate-related financial risks into banks’ overall supervisory assessments and ratings to ensure that banks are adequately managing the risks, (4) broadening the scope of future tests to other types of physical factors and transition risks and to other loan portfolios and (5) cooperate with other regulators in the U.S. and around the world to expand, strengthen and standardize climate data so that banks can accurately measure and monitor climate risk.”

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Better Markets is a nonpartisan and independent nonprofit organization founded in the wake of the 2008 financial crisis to promote the public interest in financial markets, support Wall Street financial reform, and ensure that our financial system works for all Americans again. Better Markets works with allies – including many in the financial world – to promote pro-market, pro-business and pro-growth policies that help build a stronger and more secure financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.lepemarkety.org.