Climate Stress Testing (Staff Report No. 977)

The Federal Reserve Bank of New York (‘FRBNY’) develops climate stress testing capabilities to assess the resilience of financial institutions to climate-related risks and further understand systemic climate risk exposure across financial sector. Network for Greening the Financial System (‘NGFS’) climate scenario analysis practices are considered as 27 large global banks with aggregate oil and gas loan market share exceeding 80% are subject to a stress scenario which follows the energy price collapse of 2020 resulting in a 50% drop in the return on stranded asset portfolio over six months.

The FRBNY developed a measure known as CRISK to estimate the expected capital shortfall of a financial institution in a climate stress scenario. CRISK is a function of transition risk, climate beta of a financial institution, firm size, leverage and expected equity loss conditional on climate stress. Stressed and Non-Stressed CRISK is depicted below for select banks.