US banks face challenges estimating climate risks: Fed

U.S. banking giants reported having "significant" challenges when estimating the financial risks from climate change because of a lack of good data, the Federal Reserve has said.

The six large banks, including Bank of America, Citigroup, and Goldman Sachs, participated in the 2023 pilot conducted by the U.S. central bank in order "to explore the resiliency of their business models to climate-related financial risks," the Fed said.

A summary of the exercise said the banks "reported significant data and modeling challenges," due in part to "a lack of comprehensive and consistent data" on things like building characteristics and insurance coverage. "Going forward, participants reported plans to capture additional data from clients, to source data from vendors, and to use proxies where necessary," the Fed report said.

The U.S. central bank stressed that the "exploratory" exercise would not have any consequences for bank capital requirements, or lead to any supervisory changes. Nevertheless, it marks a rare foray into the topic of climate change for the independent U.S. central bank which has looked to avoid what is still a divisive political issue in the United States.

"We are not, nor do we seek to be, climate policymakers," Fed chair Jerome Powell said in a recent speech, adding that the U.S. central bank should avoid "mission creep" and stick closely to its dual mandate from Congress to maintain stable prices and maximize employment.