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Six of the largest US banks take part in a Federal Reserve exercise

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The Federal Reserve has released a statement detailing that some of the largest American banks participated in a new exercise.

The Climate Scenario Analysis Exercise (CSA) involved some of the biggest names in banking and sought to asses their climate risk-management practices.

Banks take part in climate exercise

Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo participated.

According to the Fed “the exercise highlighted data gaps and modeling challenges that arise when estimating the financial impacts of highly complex and uncertain risks over various time horizons.”

The result was to stress test and challenge these banks to identify, estimate, monitor, and manage climate-related financial risk strategies.

“Large banking organizations and the broader financial system are exposed to climate change through macroeconomic and microeconomic transmission channels associated with physical and transition risk drivers,” according to the study results.

Physical risks relate to the damage that can be inflicted on property and people from many sources. These can range from natural disasters like wildfires, floods, and heat waves to detrimental effects on humans and locations such as rising sea levels and ocean acidification.

Transition risks comprise stress inflicted on institutions and sectors, such as policy shifts or the transition to a lower-carbon economy.

The exercise was used to identify and test the resilience of these national banking icons’ measures to address climate-related financial risks.

The Fed said that the exercise was “exploratory in nature and does not have capital consequences. Drawing on lessons learned from the exercise, the Board will continue to engage with participating banks regarding their capacity to measure and manage climate-related financial risks.”

The Fed has been in the news recently, with the US economy being a big talking point in early 2024. The government has been keen on bringing inflation down since the COVID-19 pandemic. So, the body has made no change to interest rates.

The regulator dismissed worries of a rate hike, and Wall St stocks soared in a stormy week of trading, leading to clearer economic skies.

Image: Ideogram.

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