As I read this editorial in the Wall Street Journal:
The Biden Administration recently declared climate change an “emerging and increasing threat to U.S. financial stability.†The regulators must have missed a new New York Federal Reserve Bank staff study, which finds extreme weather may actually benefit banks. The real risk to the U.S. economy and financial stability is regulators, like Mr. Biden’s nominee for Comptroller of the Currency Saule Omarova, who want to bankrupt fossil-fuel companies.
The Fed staff study comes as the Administration ramps up plans to regulate how banks deploy capital in the name of protecting the financial system from climate change. But the authors find that banks are already doing an excellent job of managing risks from extreme weather that climate change will supposedly make worse.
Examining disasters declared by the Federal Emergency Management Agency from 1995 to 2018, the Fed staff found “insignificant or small effects on U.S. banks’ performance.†Disasters boosted loan demand, which offset losses and boosted income. Income at larger banks increased the more exposure they had to disasters.
Local banks tend to avoid mortgage lending where floods are more common than flood maps would predict, which suggests “that local knowledge may also mitigate disaster impacts,†say the authors. Unlike the federal flood insurance program, banks have a financial motive to accurately calibrate disaster risks. FEMA aid didn’t explain banks’ resilience.
The Fed staff note that their findings “are generally consistent with the few papers that study the bank stability effects†of climate change, including on German and Caribbean banks. Yet they contradict a report last month by the Financial Stability Oversight Council (FSOC), established after the housing meltdown to monitor systemic risks, that endorsed more climate regulation to prevent financial instability.
a thought occurred to me. Is it possible for the banking system simultaneously to be stable and unstable? For very nearly 15 years the Federal Reserve has been behaving as though the banking system were unstable, discouraging lending and providing subsidies to banks in their place.
When a system is stable, in general it is resilient to changing circumstances. When unstable any change can be disastrous.
Which is it, Federal Reserve? Are the banks stable or unstable?
“Examining disasters declared by the Federal Emergency Management Agency from 1995 to 2018, the Fed staff found “insignificant or small effects on U.S. banks’ performance.†Disasters boosted loan demand, which offset losses and boosted income. Income at larger banks increased the more exposure they had to disasters.”
Something is wrong here. If a lender loses, as it very well might, a significant portion of its loan value in a disaster, even with insurance, they will have to make quite a few new loans at 1-1.5% ROA to recoup.
But to the point at hand. My insurer is State Farm. However, the homeowners insurance and associated flood insurance (I live on a marsh off the Colleton River/Atlantic Ocean) policy was hived off to a specialized higher risk unit. This provides better underwriting and puts a wall around a systemic issue.
The issue is the politics. Biden wants to regulate (read: demand) how capital is employed into favored industries regardless of what sound underwriting might dictate. The same occurred with loose lending standards before the 2008 crisis. Promoting “home ownership for everyone” for political reasons didn’t work out well there.
One wonders what might happen if the Fed let’s rates rise now.