Pricing Climate Transition Risk in U.S. Commercial Banking: Analyzing the Impact of Federal Reserve Climate Scenario Guidelines on Prudential Capital Buffers, Corporate Loan Spreads, and Capital Reallocation

• Abbas Ahsun

  Texas University

  Author

The integration of climate transition risk into U.S. commercial banking regulation represents a paradigm shift in prudential supervision, yet the transmission mechanisms from supervisory guidelines to capital allocation and loan pricing remain insufficiently understood. This study develops and validates a quantitative framework for pricing climate transition risk in U.S. commercial banking, examining how Federal Reserve climate scenario analysis guidelines influence prudential capital buffers, corporate loan spreads, and capital reallocation decisions. Employing a hybrid methodology combining retrospective loan-level data analysis (2015-2025) with prospective scenario simulation under the Federal Reserve's proposed 1.5°C and 2.0°C warming scenarios, the research analyzes syndicated loan pricing for over 2,700 U.S. firms. The framework integrates climate-adjusted Value-at-Risk metrics into Internal Capital Adequacy Assessment Processes, demonstrating that carbon-intensive firms (90th percentile emissions intensity) incur loan spread premiums of 4.7 basis points under transition scenarios, while regulatory capital requirements increase by 12.3% for high-emission loan portfolios. The findings reveal that climate policy expectations significantly influence credit market outcomes, with banking deregulation reducing securitization of high-emission loans by 3.9% following the 2016 U.S. presidential election. The study contributes a replicable, empirically validated framework for climate stress-testing that bridges the gap between supervisory guidance and bank-level capital planning, offering actionable metrics for regulators and financial institutions navigating the climate transition.

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Copyright (c) 2026 Abbas Ahsun (Author)

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