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The Federal Reserve announced on Thursday that it has engaged six of the country’s largest banks in a climate risk analysis due to begin next year to assess the resilience of institutions “under various hypothetical climate scenarios.”

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The banks participating in the pilot project are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.

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The Fed said in a press release that the analysis will differ from banking stress tests, which assess whether large financial institutions have enough capital to continue lending in the event of a severe recession, noting that climate scenario analyzes “are exploratory in nature and not have dire consequences.” .

“By considering a range of possible future climate changes and associated economic and financial events, scenario analysis can help firms and regulators understand how climate-related financial risks may manifest and differ from historical experience,” the statement said.

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The announcement does not provide examples of the types of scenarios that will be tested, but does say that more details will be released in the coming months.

For the first time, climate financial risk assessments will be conducted by the Fed, which is facing pressure from the political left to address climate priorities.

Federal Reserve Chairman Jerome Powell

The central bank’s climate initiative comes at a time when US inflation continues to rage as the economy shrinks, but climate activists say the move is long overdue.

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Philip Basil, director of banking policy at advocacy group Better Markets, issued a statement following the Fed’s statement, calling the move “a welcome first step in addressing the dire need to mitigate climate-related financial risks,” but adding that the central bank should have pursued it sooner. .

“To date, the Fed woefully lags behind many of its European counterparts in conducting climate scenario analysis, which is key to identifying, sizing and assessing the risks that climate change poses to the financial system,” Basil wrote.

The move could lead to additional regulations for the banking industry.

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The Banking Policy Institute (BPI), which represents several major banks, published an article on Thursday saying that “central banks and supervisors have been assessing climate-related financial risks for banks for years, with a particular focus on physical and transition risks.” and that evidence suggests that concerns about the vulnerability of large lending institutions to climate change may be exaggerated.

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“These official sector efforts have resulted in many oversight climate risk management proposals, many climate scenario analysis exercises, and many disclosure requirements across jurisdictions,” the BPI article says. “Of course, all of this would be appropriate if climate-related financial risk is a financial stability risk or a significant risk to the safety and soundness of banks; however, over the past year, the results of additional research and practical analysis conducted through climate scenario analysis cast doubt on such risks being significant and in fact suggest that short-term risks are fully manageable for large banks.”

Tyler Kendall of FOX Business and Reuters contributed to this report.