Schatz, Casten Introduce Climate Risk Stress Testing Bill

Sen. Brian Schatz (D-Hawaii) and Rep. Sean Casten (D-Ill.) introduced legislation today that would direct the Federal Reserve to subject large banks to stress tests to measure their resilience to climate-related financial risks. Schatz previously introduced the bill in the last Congress.

Among other things, the bill would direct the Fed to establish and work with an advisory group of climate scientists and economists to develop climate change scenarios, including a 1.5 degree Celsius warming scenario, a 2 degree warming scenario, and a “business as usual” scenario, which assumes a higher level of warming if there are no climate policies in place.

Stress tests would be conducted every two years for large financial institutions that are currently subject to the Fed’s Comprehensive Capital Analysis and Review stress tests. Banks would be required to create a “qualitative remediation plan” that would address how they plan to evolve capital planning, balance sheet and off-balance sheet exposures and other business operations to respond to the most recent stress test results. While Fed objections to an institution’s remediation plan would limit its ability to proceed with capital distributions, it would not require the firm to increase its current capital.

Additionally, the bill directs the Fed to work with the OCC and the FDIC to issue a “nonbinding exploratory survey” that will assess the ability of banks with more than $10 billion in assets to withstand climate risks. The survey would be issued every two years, with results reported in aggregate only. Survey participants would remain anonymous and would not face adverse consequences on the basis of their responses.