Imposing climate mandates on banks will stifle access to affordable credit


President BidenJoe BidenBriahna Joy Grey: Biden Supreme Court Promises ‘Minimal’ Gesture to Black Voters House GOP Leader Says State of the Union Turnout Could Be Capped: Report Record Registration Numbers Send a clear message about healthcare affordability, access MOREThe whole-of-government effort to mandate consideration of green factors in the financial sector will increase the cost of borrowing for households and businesses while slowing economic growth.

Now that inflation is at its peak highest levels since 1980s and that the Federal Reserve is expected to begin a series of interest rate hikes, the Biden administration should avoid implementing new policies that increase the cost of private lending for households and businesses. The rising cost of private financing could lead to a future economic downturn.

Groups defend imposing stricter monitoring requirements on banks to take account of green factors ignores the significant increase in credit costs that accompanies it.

The Biden Administration actions this myopic view, that the federal government should mandate the factors that private lenders should consider. They even admit that “some actions to address climate-related financial risks could impact financially vulnerable communities in the form of higher insurance and credit costs or the inability to obtain insurance or credit.” credit”. The costs associated with having to consider green factors can negatively impact those Americans who need capital the most.

It also assumes that banks are not already factoring in certain risks.

Financial products already incorporate green factors into contractual agreements. One to study shows that the municipal bond market already takes green factors into account, without the government needing to require banks and their counterparties to take them into account. According to the study, counties considering green factors issue bonds that “pay an average of 3.03% of total annualized costs” while “non-climate counties” pay 2.95%. Requiring banks to comply with additional disclosures and stricter capital requirements specifically to account for green factors is redundant, risks limiting the amount of funding businesses can receive and increases their borrowing costs .

Biden’s nominee to serve as vice chair for oversight on the Federal Reserve Board, Sarah Bloom Raskin, will threaten to limit the availability of affordable credit by forcing banks to undergo more rigorous stress tests and modify capital requirements to reflect green factors. Discriminating against traditional energy production by changing the methodology banks use to calculate the risk of their holdings will make the US banking system more expensive for borrowers, reduce banking competition, and force banks to take on more risk. All of these factors lead to a slowdown in economic growth.

In 2018, the Federal Reserve Bank of Philadelphia released a paper highlighting the negative effects of stricter capital requirements. The paper found that “for every 1% increase in capital minimums, lending rates will rise by 5 to 15 basis points and economic output will fall by 0.15% to 0.6%.” It also makes it clear that increased borrowing costs resulting from these requirements could impede enough financing “to create a lasting drag on overall economic activity.”

The Bank for International Settlements (BIS) has also explicitly States that tighter capital requirements force banks to reduce the availability of credit or increase lending rates, “which, in turn, can slow economic growth or, worse, worsen an economic recession.”

Another flaw in accounting for green factors is the difference between the calculation time and the credit and operational risks of a bank loan. The BIS admits in its climate report that “the time horizons over which climate risks manifest present a considerable challenge for risk quantification”. The report says banks’ strategic planning spans a three- to five-year period, while “physical climate risks are expected to increase in materiality over a much longer horizon.”

If there are risks, they would take nearly half a century have an impact on a bank’s portfolio. This mismatch makes it almost impossible to quantify green factors for banks. Requiring banks to disclose this information is also extremely burdensome, increases compliance costs and will most likely make loans more expensive for individuals and small businesses. It is unreasonable to force banks to predict how risks that appear 30 to 50 years from now will negatively impact their capital reserves and overall stability.

As the Federal Reserve plans to raise the federal funds rate in March, it is imperative that federal financial regulators do not impose duplicative regulatory measures that will require banks to retain additional capital and increase borrowing rates for businesses in all sectors of the economy. Restricting banks’ ability to disburse capital is a surefire way to slow economic growth just as the United States emerges from a pandemic and faces price hikes not seen in nearly 40 years.

Solving this downturn requires putting the right people in the right positions, who will focus on price stability and maximum jobs to ensure future economic growth.

bryan Bachur is head of federal affairs at Americans for Tax Reform and executive director of the Shareholder Advocacy Forum.


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