Fed Climate Stress Test Model for Banks Seen in Research Paper

A new study published by the Federal Reserve Bank of New York offers a model for potential future stress tests on big banks for their exposure to risks from climate change, according to Morgan Stanley.

The paper, written by a New York Fed economist and two co-authors, amounts to an “important step” toward formal stress testing of the sector for climate risks, analysts at the New York-based bank wrote in a note to clients.

The study lays out a procedure for identifying assets within a bank’s portfolio that are vulnerable to climate-related shocks, and then calculates the expected capital shortfall ...