Moderating climate risk in the financial system and other business sectors has morphed into a political brawl.
Republicans came down
The partisan battle could intensify. If Republicans retake the House and/or the Senate in the midterm elections, they would have more power to stymie any of the Biden administration’s climate ambitions that would rely on new legislation. At that point, Biden’s regulators could have as little as two years before the next presidential election to enact the kind of financial climate risk changes it has promised.
Given the potential roadblock in Congress and the likelihood the Fed post will remain vacant for a while, the White House could take advantage of the policy leeway vested in the Financial Stability Oversight Council to collect data, alter capital requirements and affect supervisory policy across multiple agencies, experts say.
“Regulators get a lot of discretion to interpret the law,” said Paul Kupiec, a senior fellow focused on banking regulation at the American Enterprise Institute. “The cleverness of this strategy is that they don’t need any legislation. All they need is the regulatory community to work on this and start the rulemaking process.”
Focus on Yellen
Yevgeny Shrago, policy counsel for Public Citizen’s climate program, said that the Treasury Department could incorporate climate change into an assessment of whether an institution is systemically risky. Shrago is urging Treasury Secretary Janet Yellen, who leads FSOC, to take aggressive steps.
“We’re hoping she’ll act now as a Treasury secretary would, not as a Fed chair would,” he said, referencing Yellen’s previous stint as head of the central bank.
Yellen’s potential influence would lie mostly in her ability to rally the heads of the other agencies on the council, such as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., to take coordinated rulemaking action.
“The power of FSOC only goes so far over the individual agencies, but the agenda-setting power that Treasury has is valuable and important,” said Hilary Allen, a law professor at American University and expert on financial stability regulation who’s testified in front of the House Financial Services Committee on climate finance.
To some extent, that’s already happening, she said. FSOC published a report on climate-related financial risks in November, pinning climate change as an emerging threat to financial stability.
Treasury does have some more concrete ability to influence one of the industries with the largest exposure to climate risk, according to advocates — the insurance sector. By the end of the year, the department’s Federal Insurance Office will
While reports are often viewed as bureaucratic exercises, they are an important first step to enacting longer-term change, and can signal that Treasury is considering an issue carefully, according to Kupiec.
Nellie Liang, under secretary for domestic finance at the Treasury Department,
“The first step to regulation is measurement,” Kupiec said.
Bank regulatory paths
Now that Raskin has withdrawn, the Fed’s vice chair for supervision post — which has been vacant since Randal Quarles stepped down at the end of December — will likely go unfilled indefinitely, observers have said.
And given the intense opposition to Raskin’s stances on climate, the possibility of another climate hawk making it through the nomination process is probably pretty slim.
“Without a vice chair of supervision, the Fed is unlikely to pursue aggressive climate-related rulemakings, stress-testing initiatives or similar ambitious projects,” said David Portilla, a partner at Cravath, Swaine & Moore LLP and a former FSOC policy advisor. “Depending on who is confirmed, these projects could even be unlikely with a vice chair.”
That will slow down efforts to incorporate banks into some kind of climate finance regulation scheme, but doesn’t stop them entirely, experts say.
One of the easiest ways for bank regulators to address climate change is through the supervisory examination process, Portilla said. Regulators could use their supervisory authority to ensure that banks are considering their climate risk, without making any big pronouncements or rulemakings.
“To change banks’ behavior without setting broad-based policies, at least publicly, the Fed could instead provide confidential supervisory feedback to banking organizations,” he said. “The Fed generally considers itself to have fairly broad discretion in providing supervisory feedback, and its confidential nature has allowed the Fed to push banks to take action outside of public view.”
In this approach, bank examiners could link climate change to risk management, encouraging banks to consider their lending to various climate-exposed sectors, or other activity that could be hurt by climate change.
Allen said the “most obvious” move for bank regulators would be to raise the countercyclical capital buffer, a cushion that the Fed could require of large banks, above the current zero percent. The Fed board could vote to raise the buffer even without a vice chair for supervision. However, the odds of that happening are unclear — no current Fed governors have called for such a move.
“Raising that buffer and requiring banks, which are in a pretty good position these days, to fund themselves with more equity, I think that’s the most basic step we should take,” she said.
What’s going to stick?
Of course, the downside to attempting to make policy through regulatory agencies is that a lot can be undone once the administration changes and new regulators are appointed. The Biden administration, for example, walked back the Trump-era Community Reinvestment Act revamp.
“The reason why these moves are low-hanging fruit is because they don’t require any legislation, and they can be done through agency discretion,” Allen said. “So that agency discretion can be reversed.”
But moves like collecting data, requiring disclosures or requiring banks to hold assets to offset potential climate losses can have longer-term implications. Once banks and other institutions create processes to comply with regulatory demands, those rules tend to stick around, at least in effect.
“Once you start that process and once that wave gets going, it's so hard to stop,” Kupiec said. “It builds a life of its own.”
