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4 Univ. Chi. Bus. L. Rev. 1 (2025)

handle is hein.journals/usitcobs4 and id is 1 raw text is: Horizons of Risk: Climate Stress and the Federal Reserve David A. Wishnick* Contemporary financial supervision depends on knowledge about risk. Threats to bank soundness and financial stability abound, but they present them- selves in amorphous ways. How should supervisors assess their significance? This Article examines a process being employed by the Federal Reserve (Fed) to assess threats posed by climate change. The process, climate scenario analysis (CSA), mod- els the impact of hypothetical climate-related events on financial market partici- pants. Descriptively, the Article argues that the Fed's approach to CSA hews closely to the most prominent supervisory innovation to emerge from the Global Financial Crisis: stress testing. With its CSA experiments, the Fed is adapting techniques and perspectives developed in response to the last crisis to confront threats that may cause the next one. This adaptation is unsurprising, but it comes with significant costs. Normatively, the Article argues that CSA efforts designed to operate like stress tests will miss or misunderstand significant forms of climate-related financial up- heaval. While the Fed's CSA framework may be successful in identifying some cli- mate-related threats to the largest, systemically important banks, it is ill-designed to recognize threats across a broad range of climate-related scenarios, and its en- gagement with the largest banks empowers them to shape CSA to serve their own interests. Further, its focus on bank soundness will lead it to miss forms of financial destabilization that may harm households and businesses even if banks manage their climate risks effectively. To address these limits, the Article argues that the Fed should move away from the stress test template in favor of CSA processes that are easier to administer and take a broader perspective on climate-related threats to the project of financial stability. I. IN TR O D U C TIO N ...................................................................................... . . 2 II. THE PATH TO CLIMATE SCENARIO ANALYSIS......................................... 11 A. Climate Change as a Supervisory Challenge.........................11 B . C SA 's Public Proponents.........................................................13 C. CSA as a Learning Process .....................................................15 III. STRESS TESTING AND CSA EXPERIMENTATION.................................... 17 Associate Professor of Law, Georgetown University Law Center. Thanks to Nakita Cut- tino, Anna Gelpern, David Hyman, Don Langevoort, Adam Levitin, Morgan Ricks, Hillary Sale, Bob Thompson, Jon Zytnick, and workshop participants at Georgetown, Rutgers, Vanderbilt, and the AALS Financial Regulation Midyear Meeting for helpful comments and engaging discussions. For their skilled research assistance, I thank Maddie Bowen, Matteo Crow, and Amelia Lucas. 1