Connect with us

Business

Wall Street sees first Fed climate change review in 2023

Published

on

November 17, 2021

By Pete Schroeder

WASHINGTON (Reuters) – While the U.S. Federal Reserve trails other major central banks in tackling climate change, it’s catching up on a critical front: figuring out if rising temperatures could topple a major bank or even the entire financial system.

The potential effects of climate change – namely through rising sea levels, worsening floods and fires, and government policies transitioning away from carbon-heavy industry – could destroy trillions of dollars of assets around the globe. As major lenders to the oil and gas industry, U.S. banks could be in the eye of the storm, according to regulators and risk management experts.

Advertisement

A U.S. Treasury Department-led report warned last month that rising temperatures were an “emerging threat” to financial stability and said regulators should use scenario analyses to build robust predictive risk-management tools.

Despite being the most influential central bank in the world, the Fed has long lagged its peers in getting a grip on those risks.

Over the past year, however, the Fed has ramped up pressure on big banks to scan their portfolios for climate change risks and could be in a position to run a formal scenario analysis and release broad findings to the public in 2023, according to seven industry executives with direct knowledge of the discussions who declined to be named.

The previously unreported growing industry consensus shows how regulators are trying to move quickly to execute President Joe Biden’s agenda to incorporate climate risk into the financial regulatory system, with major ramifications for Wall Street banks like JPMorgan Chase & Co Citigroup, Wells Fargo & Co, Bank of America Corp, Goldman Sachs Group and Morgan Stanley.

A formal climate change scenario analysis would give regulators and investors the clearest picture yet of big banks’ exposure to climate change, and increase pressure on the industry to make good on pledges cemented at this month’s U.N. climate summit to transition away from fossil-fuel lending.

Advertisement

“Right now there really isn’t any data about the scale and magnitude, or really, system-wide risks,” said Todd Phillips, a director at think tank the Center for American Progress.

The banks declined or did not respond to requests for comment.

Some European regulators have already started testing their banks for climate change risks.

Reuters reported in May that Fed supervisors had begun privately pressing lenders for data and details on their efforts to assess the exposure of their loan books to climate change.

Those discussions are being driven by Kevin Stiroh, who began leading the Fed’s climate change supervisory work in February. They have intensified in recent months and started to focus on how a balance sheet scenario analysis might work, according to the executives.

Advertisement

“Broadly speaking, regulators are moving forward with all due speed on this,” said Sean Campbell, head of policy research at the Financial Services Forum, which represents big banks, adding a 2023 timeline “is about right.”

Fed officials have not previously indicated when they would expect to perform an analysis. In an interview with Reuters, Randal Quarles, the Fed’s outgoing vice chair for supervision, said that there was no official timeline, but he likewise told Reuters two years “sounds about right.”

Unlike bank stress tests which allocate capital, the scenario analysis is expected to broadly function as a standalone data-gathering exercise and would not result in capital charges, said the executives and the Forum’s Campbell.

Nevertheless, it would generate critical data that could pave the way for regulators to introduce capital penalties or other lending restrictions.

In a recent interview with Reuters, JPMorgan CEO Jamie Dimon said he believed climate scrutiny from the Fed was “unavoidable” and would eventually lead to additional capital requirements.

Advertisement

POLITICAL PRESSURE

Some congressional Democrats and progressive groups want the Fed to move faster and roll out an analysis as early as next year, and hope an impending reshuffle of the central bank’s board may speed things up.

“What they have now certainly would allow them to start running some level of scenarios both on physical and transition risks,” said Phillip Basil, director of banking policy at progressive think tank Better Markets and a former Fed official.

Republicans say the Fed should not drive climate policy and fear oil and gas companies could lose access to capital.

“They’re super sensitive to the politics around this,” said one of the industry executives referring to Fed officials.

Advertisement

The Fed is an independent agency and chair Jerome Powell, who could soon be renominated to the role, has said the central bank’s mandate is to focus only on risk-management issues.

“The Fed should pursue scenario analysis, and analysis of the effect of climate on the financial system generally and rigorously and analytically,” Quarles told Reuters.

“There’s a lot of work to be done in developing something like that.”

DIMON SEES EVENTUAL CLIMATE CHARGE

Climate risk testing is highly complex and novel territory for the Fed which is looking closely at what its counterparts in Europe and elsewhere are doing , the people said.

Advertisement

The Netherlands and France have put their banks through climate-change exams, and the Bank of England and European Central Bank plan to do the same in coming months.

Broadly speaking, those exams assess how bank balance sheets would fare under a range of economic scenarios which are modeled based on how aggressively policymakers act to curb temperature rises.

For example, the Bank of England’s upcoming analysis includes two scenarios in which both early and rushed policy responses ultimately help cap average global temperature rises at 1.8 degrees Celsius higher than pre-industrial levels, and a third scenario in which inaction results in a 3.3 degrees Celsius increase.

So far, no country has gone so far as to directly tie bank capital requirements to the results.

The Fed last year joined the Network for Greening the Financial System, an international group of regulators which has designed a range of scenarios the central bank could lean on.

Advertisement

Much of the supervisory discussions are focused on how banks can identify, analyze and model both financial and non-financial data. One executive said lenders are struggling with stale and retrospective weather data, and how to capture emissions related to clients’ downstream suppliers, among other challenges.

Fed governor Lael Brainard, who could potentially replace Powell or Quarles, in a speech last month acknowledged the data challenges, but said regulators have to start somewhere.

It was unclear if the Fed would follow its overseas peers and publish the aggregate results from all the big banks, rather than from each institution, said several of the sources.

Campbell said it was also unclear whether the Fed would give banks specific climate change scenarios similar to the economic scenarios it devises for annual bank stress tests, or just broad parameters.

He added it was not a given the Fed would ultimately try to use a scenario analysis to allocate capital because such exercises try to gauge risks over a much longer time horizon and with far bigger assumptions than traditional bank stress tests.

Advertisement

Some bankers, though, disagree.

“When they figure out what they really want to stress test and it’s really real, they probably will appoint capital,” said Dimon.

(Reporting by Pete Schroeder; additional reporting by Matt Scuffham; editing by Michelle Price and Edward Tobin)

Advertisement
Continue Reading
Advertisement

Business

Investors brace for potential hit to earnings because of Omicron

Published

on

December 6, 2021

By Caroline Valetkevitch

NEW YORK (Reuters) – As details of a new COVID-19 variant emerge, investors are bracing for a potential hit to U.S. corporate earnings, particularly among retailers, restaurants and travel companies.

News of the Omicron variant comes in the middle of the holiday shopping period, and many businesses are already struggling with higher inflation and supply chain snags because of the pandemic.

Advertisement

That is putting the focus again on these companies affected by the reopening of the economy, said Kristina Hooper, chief global market strategist at Invesco in New York.

“Are we still going to see traffic into restaurants and retailers, or at least retailers that derive most of their revenue from in-store traffic as opposed to online?” she said. “The other area of vulnerability of course is supply chain disruptions.”

She and other strategists said it’s too early to tell the extent to which the variant could affect earnings.

The Omicron variant that captured global attention in South Africa less than two weeks ago has spread to about one-third of U.S. states, but the Delta version accounts for the majority of COVID-19 infections as cases rise nationwide, U.S. health officials said on Sunday.

Goldman Sachs on Saturday cited risks and uncertainty around the emergence of the Omicron variant as it cut its outlook for U.S. economic growth to 3.8% for 2022. While the variant could slow economic reopening, the firm expects “only a modest drag” on service spending, it said in a note.

Advertisement

U.S. companies have just wrapped up a much stronger-than-expected third-quarter earnings season, and the rate of fourth-quarter earnings year-over-year growth has been expected to be well below the previous quarter’s.

Analysts see fourth-quarter S&P 500 earnings up 21.6% from the year-ago quarter, while third-quarter earnings growth was at about 43%, according to IBES data from Refinitiv.

That fourth-quarter forecast has not changed since Nov. 26, just after the new variant became headline news.

Omicron may be affecting travel plans. Airline shares have already come under pressure, with the NYSE Arca airline index down 8.3% since the close of the session before Nov. 26.

For companies, “the significance of the impact will depend on how long the Omicron measures last,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. “There will be some short-term impact… It’ll surely cause some short-term disruption to travel.”

Advertisement

Colin Scarola, a vice president of equity research at CFRA, wrote in a Dec. 2 note on the airline sector that while details of the variant are still emerging, trends in U.S. air travel over recent months with the Delta variant may give some insight into what could happen to travel under the Omicron variant.

“This recent history tells us that most people have already accepted the material risk of infection with a Covid-19 variant when fully vaccinated. But knowing that risk of severe illness remains very low, they’ve been comfortable flying on airplanes,” he wrote.

Compounding concerns about the 2022 earnings outlook are higher costs for companies, with Federal Reserve Chair Jerome Powell last week signaling that inflation risks are rising and numerous companies citing rising costs during the third-quarter earnings season.

Even before the Omicron news, Tuz said investors were reading “more and more about inflation and wages and other inputs,” and that was expected to continue into 2022.

“I don’t know if the ability to pass along these higher costs is going to exist as much,” he said.

Advertisement

(Reporting by Caroline Valetkevitch; Editing by Alden Bentley and Nick Zieminski)

Continue Reading

Business

Bank investment chiefs signal China and emerging market caution

Published

on

December 6, 2021

LONDON (Reuters) -Market volatility and uncertainty over China’s indebted property sector is making bank investment chiefs cautious about its assets, amid more general nervousness about broader emerging markets.

“I would take a wait-and-see approach on emerging markets,” Credit Suisse global chief investment officer Michael Strobaek told the Reuters annual Investment Outlook Summit.

“I would take a day-by-day, week-by-week approach to China, to see what’s unfolding on the default side and the policy side,” he said, referring to problems in the country’s giant corporate debt sector.

Advertisement

“Only if I see real deep opportunities, I’d go back in.”

Willem Sels, Global CIO, Private Banking & Wealth Management, HSBC, said clients needed to take a longer term view on emerging markets after many were hurt by recent volatility.

“We have a neutral view on China, we try to diversify,” he said.

“We try to get the confidence of investing in China. We try to align ourselves with what is clear in terms of government policy, and that’s the net zero transmission.”

Investors can still “find some winners” in China by digging down into areas like green tech and 5G-related businesses where the government was showing significant support, said Mark Haefele, CIO at UBS Global Wealth Management.

Advertisement

(Reporting by Tommy Wilkes, Sujata Rao and Dhara Ranasinghe; Editing by Alexander Smith)

Continue Reading

Business

IMF says euro zone should keep supporting economy, high inflation is temporary

Published

on

December 6, 2021

BRUSSELS (Reuters) – Euro zone governments should continue to spend to support the COVID-19 economic recovery, though in an increasingly focused way, and consolidate public finances only when it is firmly under way, the International Monetary Fund said on Monday.

In a regular report on the euro zone economy presented to the group’s finance ministers, the IMF noted, however, that while consolidation itself could wait, a credible way of how it would be done in the future should be announced already now.

“Policies should remain accommodative but become increasingly targeted, with a focus on mitigating potential rises in inequality and poverty,” the IMF said.

Advertisement

“Fiscal policy space should be rebuilt once the expansion is firmly underway, but credible medium-term consolidation plans should be announced now,” it said.

The Fund also noted that the rise in inflation, which hit a record high of 4.9% on a year-on-year basis in November, was temporary and, therefore, not a big threat because it did not translate into a spike in wages, called a second-round effect.

“Recent inflation readings have surprised on the upside, but much of the increase still appears transitory, with large second-round effects unlikely,” the report said, adding that the European Central Bank’s monetary policy should therefore continue to be accommodative.

“Structural reforms and high-impact investment, including in climate-friendly infrastructure and digitalization, remain crucial to enhancing resilience and boosting potential growth,” the IMF said.

(Reporting by Jan Strupczewski; Editing by Paul Simao)

Advertisement

Continue Reading
Advertisement

Trending