Wednesday, December 09, 2020

The Slippery Slope of Using Banks to Advance a Political Agenda

On October 29, 2020, the New York State Department of Financial Services (DFS) issued a letter to all depositories and non-depositories regulated by them regarding climate change and financial risks. This post is not about climate change. It is about how an unchecked bureaucracy can implement an agenda it cannot get through duly elected legislative bodies by wielding the power of regulation.

In her letter, Linda Lacewell, the DFS superintendent, said she expected regulated depositories under DFS supervision to:

1. Start integrating the financial risks from climate change into governance frameworks, risk management processes, and business strategies. For example, institutions should designate a board member, a committee of the board (or an equivalent function), as well as a senior management function, as accountable for the organization's assessment and management of the financial risks from climate change. This should include an enterprise-wide risk assessment to evaluate climate change and its impacts on risk factors such as credit risk, market risk, liquidity risk, operational risk, reputational risk, and strategy risk; and

2. Start developing their approach to climate-related financial risk disclosure and consider engaging with the Task Force for Climate-related Financial Disclosures framework and other established initiatives when doing so.

I visited the Task Force for Climate-related Financial disclosures website and downloaded their report to see what Superintendent Lacewell was talking about (see picture). 

Not sure what they mean by metrics and targets. But the report does suggest that financial institutions in their annual reports disclose all of the above, including how much lending they do to climate related industries. Meaning how much lending do you do to industries that a partisan might not like, so that the power of the mob could agitate such a high level of reputational risk that the reporting financial institution would reduce or eliminate serving the out-of-favor industry(s).

A reminder, this is a far bigger issue than climate change. So don't come at me if you want to talk about climate change. This is about using the power of regulation to exert political will that does not have enough popular support amongst the governed to enact legislation.

In response to this alarming tactic, the OCC proposed in November a rule to ensure fair access to banking services provided by national banks, federal savings associations, and federal branches and agencies of foreign bank organizations. In its letter, acting Comptroller of the Currency Brian Brooks said "Fair access to financial services, credit, and capital are essential to our economy. This proposed rule would ensure that banks meet their responsibility to provide their services fairly since they enjoy special privilege and powers because if the system fails to provide fairness to all, it cannot be a source of strength for any."

The OCC's proposal would apply to the largest banks (>$100B in assets) in the country that may exert significant pricing power or influence over sectors of the national economy. If that last sentence isn't a testament to the importance of diversifying financial services, not sure what is. The proposal would require a covered bank to ensure it makes its products and services available to all customers in the community it serves, based on consideration of quantitative, impartial, risk-based standards established by the bank. Under the proposal, a covered bank's decision to deny services based on an objective assessment of the person's creditworthiness, ability to pay, or other quantitative, impartial, risk-based reasons would not violate the bank's obligation to fair access. Not sure what's worse. Bank's being bullied to "not lend" to industries based on the shrill of the mob or being forced to lend to industries that are against their values.

Now you may be in full agreement with strong-arming financial institutions to not lend to coal burning utilities. 

But what about when you don't agree? Think about an industry or issue that you favor. And a bureaucrat waves the magic wand to cut off financial services or make it so difficult for the financial institution to bank your "favored" cause that it wouldn't be worth it.

The top 10 banks already control over 50% of all US banking assets. This is a testimony to decentralize banking. It's also a glimpse of how governments, without a will of the people mandate, can advance their agendas without consulting the people. It's a glimpse into tyranny.

~ Jeff

No comments:

Post a Comment