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The six largest US banks have been tasked by the Federal Reserve to analyse the impact of trial scenarios for both physical and transition risks related to climate change on real estate assets in their portfolios.

The banks under scrutiny are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.

The exercise - first signposted last year - will gather qualitative and quantitative information over the course of the pilot, says the central bank, including details on governance and risk management practices, measurement methodologies, risk metrics, data challenges, and lessons learned.

"The Fed has narrow, but important, responsibilities regarding climate-related financial risks - to ensure that banks understand and manage their material risks, including the financial risks from climate change," vice chair for supervision Michael Barr says. "The exercise we are launching today will advance the ability of supervisors and banks to analyse and manage emerging climate-related financial risks."

The pilot exercise includes physical risk scenarios with different levels of severity affecting residential and commercial real estate portfolios in the Northeastern United States and directs each bank to consider the impact of additional physical risk shocks for their real estate portfolios in another region of the country.

For transition risks, banks will consider the impact on corporate loans and commercial real estate portfolios using a scenario based on current policies and one based on reaching net zero greenhouse gas emissions by 2050.

Climate scenario analysis is distinct and separate from bank stress tests. The Board's stress tests are designed to assess whether large banks have enough capital to continue lending to households and businesses during a severe recession. The pilot climate scenario analysis exercise, on the other hand, is exploratory in nature and does not have capital consequences.

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