Federal Reserve Climate Risk Management: Challenge Framework for Financial Institution Oversight

Executive Summary

Climate risk supervision represents an emerging area where the Federal Reserve expects banks to develop sophisticated challenge capabilities. Financial institutions must implement independent oversight of climate risk identification, measurement, and management processes across physical and transition risk categories.

Challenge Framework Components

Climate Risk Identification

• Independent assessment of physical risk exposure across geographies and business lines
• Challenge of transition risk assumptions related to policy and technology changes
• Validation of climate risk data sources and scenario modeling approaches

Scenario Analysis and Stress Testing

• Challenge of climate scenario selection and calibration methodologies
• Independent review of transmission mechanisms and loss estimation models
• Validation of time horizons and uncertainty quantification approaches

Regulatory Context

• Federal Reserve Climate Risk Statement - Supervisory expectations for large banking organizations
• SR 23-12 - Climate-related financial risk management principles