Climate change mitigation creates a roadmap to a nationalized financial system

A Biden administration executive order issued in May required the Financial Stability Oversight Council (FSOC) and its member agencies to report on the risks climate change poses to the financial sector and recommend actions needed to mitigate the risks. alleged risks.

October report little press Warning even if it represents the first stage of the administration’s project to use Dodd–Frank Act power to effectively nationalize and deeply politicize the financial system. Existing laws will be used to enact new financial regulations that will allow the administration to control the allocation of investment capital under the guise of controlling systemic risk in the financial sector.

The current fashion in climate change discussions within the financial sector distinguishes between two sources of climate change risk: extreme weather related losses caused by physical damage and losses associated with transition risk. Transient risks are hypothetical losses that could materialize if governments and consumers change their policies and demand patterns in response to new information about the immediacy of the existential threats that greenhouse gas emissions cause. human impact on the climate and the environment.

With respect to weather events, those who believe that greenhouse gas emissions will inevitably lead to destructive global warming argue that higher temperatures will increase the frequency and severity of events such as hurricanes, tornadoes, blizzards, droughts, floods, severe thunderstorms and hail. . However, to date, there is little evidence that supports these predictions.

According to Steven Kooninformer Undersecretary for Science to President Barack Obama at the U.S. Department of Energy:

“Over the past, about almost a century, we see no detectable trend in hurricanes. We have seen for about 70 years some intensification of precipitation on the earth… In terms of record temperatures in the United States, it is no more common today than it was 100 years ago. Yes, global sea level rise has accelerated in recent decades, but it was also doing the same thing in the 1930s, when in fact human influences were much weaker . So a lot of what we see can be attributed to natural variability, or at least we have to show that it’s not natural variability… And the temperature has already risen by one degree [since 1900]. So that remains to be seen. »

Regulatory concerns about the magnitude of hypothetical weather-related financial sector losses are misguided. Banks and insurance companies have dealt with losses from hurricanes, tornadoes, droughts and other extreme weather events for centuries.

The data suggests that, on average, extreme weather events pose little risk to bank solvency. A recent report from the Federal Reserve Bank of New York study finds that over the past 25 years, banks have skillfully managed extreme weather events through smart underwriting practices, geographic diversification and profits from the increased demand for loans that inevitably follows the consequences weather-related disasters.

Property and casualty insurance companies are tasked with anticipating, pricing and mitigating losses associated with extreme weather events. Reinsurance markets exist to mitigate risks that cannot be managed internally. Like a study According to documents from the Society of Actuaries, extreme weather-related losses have never endangered the solvency of a large insurer and insurance companies are inherently an unlikely source of systemic risk.

The real reward for climate change pessimists is transition risk. Transition risk is the risk that someday in the future, new information will convince policy makers and consumers that the climate has reached “a tipping point” and that drastic measures must be adopted to reduce greenhouse gas emissions. greenhouse if humanity is to be saved from a global crisis. global warming disaster.

Under this scenario, governments will respond by adopting policies that prohibit activities that generate emissions to prevent “Two days later” to occur. Households and financial institutions will immediately try to sell any asset linked to emissions-generating activities, leading to massive “sell-off” losses for households and financial institutions. The crisis will intensify as these losses trickle down to the financial system.

According to a article Written by a senior treasury official in the Biden administration, the agency that controls FSOC policy, such a rhetorical hypothetical scenario is reason enough to declare the climate change transition a serious source of systemic risk for the financial sector. . Additionally, under the provisions of the Dodd-Frank Act, the official wrote that such a conclusion gives the FSOC and its member institutions the power to anticipate and mitigate these risks through preventive monitoring and regulations that thwart transient speculative climate change risks that may never materialize. .

The real objective is to control the allocation of capital in the financial system using the regulatory powers of FSOC members. Regulators will impose new rules that will restrict the ability of financial institutions to finance greenhouse gas emissions-intensive activities. They will require companies to disclose government-approved measures of their greenhouse gas emissions, then take action to discourage investment in business or consumer loans tied to high greenhouse gas emissions. tight.

The new regulations would take the form of higher regulatory capital requirements for investments that finance companies with high greenhouse gas emissions; prudential stress tests that incorporate extreme climate shocks linked to the transition, the results of which determine the minimum regulatory capital requirements; high margin requirements and collateral haircuts for securities and derivatives related to high greenhouse gas emissions activities; limits on total greenhouse gas emissions associated with an investment portfolio and requirements for rating agencies to downgrade securities linked to high greenhouse gas emissions.

Using the systemic risk powers granted by the Dodd-Frank Act, unless stopped, agenda-driven financial regulators will change the minimum regulatory standards that apply to investments made by banks, securities firms, insurance companies, mutual funds, private equity firms and other asset managers in a way that stifles funding from companies that are supposed to endanger the financial system by their greenhouse gas emissions.

If this is allowed, not only will the price of energy and energy-consuming consumer goods rise dramatically, but our capitalist system, which allocates investment capital to its highest and most productive use, will be replaced by a system where unelected federal bureaucrats decide what investments and activities are funded.

Paul H. Kupiec is a Senior Fellow at the American Enterprise Institute (AEI), where he studies systemic risk and the management and regulation of banks and financial markets.

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Don F. Davis