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The Federal Reserve is starting a climate experiment

Vox: “The central bank is studying climate risks at major banks, but Fed chair Jerome Powell doesn’t want to get involved in policy…How to run a climate experiment on a bank – The Fed is careful to note that its climate scenario analysis is different from a stress test. In Fed-speak, a stress test measures whether a bank has enough money to meet its obligations during difficult economic times. The Fed can then use the results to set new rules or adjust its policies. The climate scenario analysis, by contrast, is more of a storytelling exercise. One pathway imagines a world in which there are basically no new climate policies between now and 2050, allowing current economic trends to continue. The other chalks out a pathway to net-zero greenhouse gas emissions by the middle of the century. The Fed is building on climate models developed by the Intergovernmental Panel on Climate Change (IPCC) and financial models from the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). In both of these worlds, banks will then have to figure out how their loan portfolios would respond to the aforementioned physical and transitional risks…”

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