Regulators must act to protect the financial system from climate risk: report

Federal regulators must act quickly to demand that banks isolate themselves and their customers from the potentially destructive financial effects of climate change and the energy transition, a new report by Public Citizen and Americans for Financial Reform found.

The report is a wishlist of policies the two groups are putting in place ahead of a key report on climate risk in the financial system from the Financial Stability Supervisory Board (FSOC), which was commissioned by a May decree from President Biden.

In this report – which was originally scheduled for November but was postponed until next week – the Treasury Secretary Janet YellenJanet Louise YellenWho’s Afraid of the EU’s Carbon Adjustment Plan? Federal Reserve officials feared inflation might last longer ‘than they currently assumed’ Balance / Sustainability – Brought to you by Altria – We are falling behind in the race to net zero, according to a key agency in the energy PLUS, who chairs the FSOC, is expected to recommend some form of mandatory climate risk disclosure.

This is the idea, taken up by the president of the Securities and Exchange Commission Gary GenslerGary Gensler Regulators Must Act To Protect Financial System From Climate Risk: SEC Report Polling Wall Street Banks’ Literature On Digital Employee Communication: Report Protecting Consumers Also Requires Protecting And Inciting Whistleblowers MORE and sen. Elizabeth warrenElizabeth WarrenWarren: Billionaires Who ‘Have Enough Money To Shoot Themselves Into Space’ Will Pay The Bill For Reconciliation Regulators Must Act To Protect Financial System From Climate Risk: Report Democrats Call On White House To Explore Sharing Moderna technology abroad PLUS (D-Mass.), That banks and publicly traded companies should be required to inform investors and regulators of their degree of exposure to the effects of climate change and the potential consequences of a rapid loss of confidence in fossil fuels.

But disclosure alone is not enough to avoid the possibility of a sudden “Emperor’s New Clothes moment” of disenchantment with fossil fuels that could crush the financial system, the co- author of Public Citizen’s Yevgeny Shrago report.

The Biden administration has announced plans for the United States to reach net zero emissions by 2050 amid a wave of investment and enthusiasm in the industry and investment in electric vehicles and energies renewables that threatens a sudden loss of confidence in fossil fuels, Shrago noted.

“If we’re going to stop burning fossil fuels by 2050, you don’t want to own them in 2049, and if not in 2049, then probably not in 2048, and so on.”

“So, will there be a time when everyone goes: ‘All these [fossil fuel] the reserves are worth nothing, there is no reason to continue to produce them ”, where that triggers a clearance sale, lowers assets and pushes companies into bankruptcy? This can underlie much of the exposure of banks. “

Disclosure of this risk is essential, said Shrago but it is no more sufficient to resolve the underlying process than it was before the 2008 financial crisis.

During the mortgage-backed securities trading and credit default swapping frenzy that characterized this bubble, players in the financial system took actions they knew to be risky and potentially destructive to the system in his outfit. because those actions were always in their temporary or personal personal interest, Shrago said.

“In 2008, more disclosure wasn’t the answer we needed more risk taking oversight, ”said Shrago.

As such, the report urges federal regulators to follow the steps of those in the UK and the European Union and require US banks to conduct “climate stress tests”, carefully auditing their portfolios based on various potentially disastrous scenarios, such as major natural disasters or natural disaster. sudden loss of confidence in fossil fuels, and start taking steps to become more resilient to them.

For example, if they continue to invest in fossil fuels, banks could hedge this risk by investing more in renewables to reduce their vulnerability to “transition risk”.

In the long run, Public Citizen and Americans for Financial Reform want regulators to require banks to use this information as the foundation for a more forward-looking and resilient financial system.

As such, some of the measures they recommend go against the immediate financial interests of shareholders and management but which could isolate taxpayers. and the system as a whole of a potential collapse.

One of these longer-term recommendations is to increase the capital requirement that banks making investments deemed risky must have on hand. and that they do it by issuing more shares, and not by receiving more deposits, that is, debts.

Neither management nor shareholders like to do this because it dilutes the share price, said Shrago – another place where short-term and long-term incentives don’t line up.

Banks must “ensure that if they hold riskier assets, they raise funds from shareholders to cover those riskier assets, so if they are wiped out, it is the shareholders who lose and not the debt holders.” who are which depositors by implication, who by implication is the US government, which guarantees these deposits through the Federal Deposit Insurance Corp., Shrago said.

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Don F. Davis

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