The Federal Reserve is making few friends with its new attempt to understand how climate change could affect the country’s financial system. The effort would require major banks to analyze how various future scenarios would affect their bottom line. Conservative lawmakers have accused the Fed of overstepping its authority, while a progressive watchdog group says the required analysis is too narrow to be helpful. In a story today, POLITICO’s E&E News reporter Avery Ellfeldt breaks down how the Fed’s new climate test works and what it’s trying to achieve. Spoiler: Modeling catastrophic climate change is even harder than it looks. The test: The Fed has set a July deadline for the nation’s six largest banks to show how various climate change scenarios would help or hurt their bottom lines. Banks will be asked, for example, to model how their real estate portfolios would weather hurricanes of various sizes in the Northeast. The banks — JP Morgan Chase, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley and Citigroup — will also be required to model how a transition to low-carbon electricity would affect their holdings. The scope: The Fed isn’t asking banks to estimate how many dollars they may lose amid intensifying weather disasters or a transition to clean energy. Instead, the idea is to gain a better understanding of banks’ approach to the issue by asking them to assess how a portion of their business would fare under specific climate futures. Analysts agree the exercise is rather narrow. But “you have to start somewhere,” Mark Narron, an analyst and senior director at the credit ratings firm Fitch Ratings, told Avery. Still, other analysts say the modeling the Fed is using is underdeveloped and overly simplistic. What comes next: After running the scenarios, the banks will calculate and report a range of outcomes by the end of July, including the probability that customers would default on their loans, how many dollars those loans would cost the banks and how the scenarios would affect borrowers’ overall risk. While the Fed said the information provided by the banks could “inform” future programs, the agency offered little detail on how. Officials have also not outlined whether, or when, the exercise would be expanded.
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