New Bill Mandates Climate 'Stress Tests' for Big Banks, Surveys Smaller Lenders

This proposed legislation, the Climate Change Financial Risk Act of 2025, directs the Federal Reserve to start evaluating how major financial players would hold up against the financial shocks of climate change. It sets up a system requiring the biggest banks and certain nonbank financial companies—those with at least $250 billion in assets, and potentially some with over $100 billion if the Fed deems it necessary—to undergo regular climate-related financial risk analyses. The core idea is to see if these large institutions have enough capital to absorb losses under specific climate warming scenarios.

Putting Climate Risk Under the Microscope

The bill requires the Federal Reserve, working with climate science leads and a new technical group of scientists and economists, to develop three distinct climate risk scenarios within a year: one assuming a 1.5°C global temperature increase, one assuming 2°C, and one based on the likely temperature increase given current implemented policies. These scenarios must consider both physical risks (like damage from floods, wildfires, or sea-level rise impacting assets) and transition risks (financial hits from shifting policies, new technologies, or changing markets as the world moves away from fossil fuels). Think about how a bank's portfolio of coastal mortgages (physical risk) or loans to fossil fuel companies (transition risk) might fare under these future conditions. The new Technical Development Group, established by Section 4, will advise on creating these scenarios and even offer technical help to companies figuring out their risks.

The Fed's Watchdog Role: Analysis and Action Plans

Starting biennially, the Federal Reserve will use these scenarios to analyze if the large financial institutions, defined as "Covered Entities" (Section 3), have adequate capital. According to Section 6, the first three rounds of these analyses won't carry penalties, giving firms time to adjust. After that initial period, however, each covered entity must submit a "Climate Risk Resolution Plan" based on the analysis results. This plan needs to detail how the company will address identified vulnerabilities, including setting targets for its balance sheet and operations. The Federal Reserve gets the power to reject these plans if they're deemed inadequate, unreasonable (including potential negative impacts on vulnerable communities), based on flawed assumptions, or considered an "unsafe or unsound practice." A rejected plan means the company can't make capital distributions, like paying dividends or buying back stock, potentially hitting shareholder value.

Taking the Temperature of Smaller Players

It's not just the giants under scrutiny. Section 7 mandates a survey for "Surveyed Entities" – banks and other financial institutions supervised by federal regulators with assets between $10 billion and the covered entity threshold. This survey, developed and administered by the Fed in consultation with the OCC and FDIC, aims to gauge these smaller players' ability to withstand the climate scenarios, identify those heavily exposed to climate impacts (due to geography or industry focus), and understand their plans for adaptation. The Fed will publish summary reports of these survey results, showing aggregate trends and whether the planned adaptations seem plausible and effective, but importantly, these reports won't name individual institutions. This provides a broader view of climate risk in the financial system without the direct regulatory consequences faced by the largest firms.