Yellen on climate

From Janet Yellen's Questions for the Record in Senate confirmation testimony, January 21, 2021, p. 70  

I am concerned about recent proposals to advance a liberal environmental policy agenda through the regulation of banks and other financial institutions. Particularly troubling are calls to implement climate stress tests on banks. Financial regulators lack the expertise to make environmental policy. 

More importantly, generating environmental regulation is not the mission of financial regulators. Rather than regulating the safety and soundness of a financial institution, climate stress tests and other climate policies in the banking space are designed to prevent those institutions from holding certain assets as a form of indirect punishment against disfavored industries such as oil and gas. Moreover, the climate stress tests are not a function of climate change itself impacting the firm’s assets, but rather the risk that government—specifically unelected bureaucrats—will implement policies to ban or restrict them. Thus, climate change regulation is a self-fulfilling prophecy for the government: your oil and gas assets are unprofitable because we have decided to make them so. 

Moreover, as the last year has demonstrated, banks are in a resilient position even when facing a severe unexpected financial downturn. As Federal Reserve Governor Randy Quarles noted in November 2020: 'Liquidity and capital remain high and, indeed, have increased at our largest banks over the course of the COVID event. Firms have sharply increased their reserves, setting aside resources today against losses they may incur tomorrow. Banks are well positioned to serve as a bulwark against broader financial and economic stress.' Adding an additional stress testing regime to the existing one would impose significant economic costs, but is not likely to result in a material additional benefit to stability.

I quote at length because this is so well written, and so sensible. (Thanks to a correspondent.) 

on July 11, 

Climate change also introduces new and increasing types of risk. The risks from more frequent and severe natural disasters—so-called physical risks—have, and will continue to become, more prominent. Then there are the risks that may accompany the technological, market, and policy changes needed to address climate change—the so-called transition risks. The emergence of these risks challenges one of the financial sector’s most essential functions—ensuring that risk is borne by investors and institutions well placed to manage it.

President Biden has recognized that this is a major problem that needs to be tackled now. He recently signed an Executive Order on climate-related financial risk, outlining a whole-of-government process to assess climate risk to the U.S. financial system and federal government.

As part of this process, the Financial Stability Oversight Council (FSOC), which I chair, will assess the potential risk that climate change may pose to the financial stability of the United States. The Executive Order also made clear this Administration’s policy to advance the disclosure of climate-related financial risks, which we will also explore through FSOC. This will complement the work of the SEC, which is currently reviewing existing guidance on climate-related financial disclosures.

Treasury is also working closely with our domestic regulators as we engage in international discussions to promote effective and consistent approaches to disclosure. These efforts build on existing work to improve climate-related financial risk disclosure, like the Financial Stability Board’s Task Force on Climate-related Financial Disclosures and other sustainability reporting organizations.

I cut out everything but the financial regulation part. If the Administration and Treasury want to use every tool legally at its disposal to implement a climate policy, that's proper. I think the policy they are proposing will waste a huge amount of money and not help the climate, but they won an election not me. My beef is sneaking this in through financial regulation and imaginary "climate risks."  Context and fuller explanation in my previous post on climate financial regulation. 

Bring back the thoughtful sensible January version of Janet Yellen! 

from The Grumpy Economist https://ift.tt/3ehemJr