Table 3.

Climate stress testing effectiveness and capacity

	Criteria	Bank of England	US Federal Reserve
Scope	Systemically important and materially climate-exposed financial institutions	Large UK banks, building societies, and general and life insurers	Largest and most complex US banks; scope could be expanded via FSOC designation and scenarios could inform broader US stress testing regime
Scenario Design and Modeling Approach	Physical and transition risks with appropriate spatial and temporal resolution and robust representation of uncertainty and interdependencies	Three scenarios combining physical and transition risks over a 30-year time horizon with 5-year reporting intervals and a static baseline balance sheet; separate analysis of litigation risks for general insurers	Climate scenarios could be implemented as part of the comprehensive macro scenario or as an added component; necessitates the development of threat-specific narratives for climate risks and transmission pathways
Metrics	Performance-based and decision-relevant metrics derived from quantitative and qualitative outputs	Quantitative metrics include changes in banking book assets for banks and liabilities and assets for insurers; qualitative metrics include climate risk measurement and management assumptions and approaches for participants and selected counterparties	Existing capital-based metrics could be used to assess performance, but disaggregated balance sheet impacts and broader risk management processes may be more informative; additional metrics should be considered as climate risk data, methodologies, and frameworks advance
Systems Analysis	Firm-level analysis enables system-level modeling of the effects of climate change on financial stability via risk aggregation and amplification	Facilitated by concurrent application and detailed reporting for banks and insurers, as well as follow-on data collection to assess system-wide interactions, inconsistencies, and financial stability implications	Requires expansion, but the scope and concurrent application could facilitate analysis of second-round effects and the counterparty analysis could be expanded to improve the measurement of system-wide interactions and financial stability implications
Market Discipline	Incentivizes improved risk management practices and enables price corrections via disclosure	Increased climate risk awareness among participating firms via individual feedback and integration into supervisory assessment; potential for price corrections limited by aggregate disclosure	Granular disclosure could facilitate market discipline among participating firms and their stakeholders
Mitigation Evaluation	Firms articulate and assess the effectiveness of alternative strategies to increase resilience to climate risks	Static balance sheet in the first round, but articulation of potential management actions in the second round and documentation of assumptions about counterparties’ actions	Mitigations could be represented in capital planning via dynamic balance sheets, as well as in expanded use of the qualitative assessment to include climate risk management processes
Evidence-Based Regulation	Supports the monitoring of climate-related systemic risk accumulation and propagation and informs the design and implementation of microprudential and macroprudential standards	Monitoring the accumulation and propagation of climate-related systemic risk is an explicit purpose; not used for calibrating firm- or system-level capital standards (routine stress tests are used to calibrate these requirements), but will inform interagency and international cooperation on climate-related financial risk regulation	Monitoring the accumulation and propagation of systemic risk is an explicit purpose (but routine stress tests are not used to calibrate macroprudential requirements); could be used to calibrate microprudential capital standards with sufficiently robust measurement approaches