The Fed’s new climate-change mandate

livemint.com:

There’s no shortage of risks to keep bankers up at night: Rising interest rates, wars, commercial real estate, a weakening Chinese economy. Yet financial regulators want banks to focus on—drum roll, please—climate change.

The Federal Reserve, Federal Deposit Insurance Corp., and Comptroller of the Currency on Tuesday published guidance directing banks on how to manage putative climate risks. The agencies say they aren’t dictating how banks lend to accelerate the shift to a lower-carbon economy.

But reading between the lines, that’s exactly what they’re doing. The guidance says banks must manage their balance sheets for physical risks from climate change, such as flooding or drought, as well as the “stresses to institutions or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes that would be part of a transition to a lower carbon economy." In other words, banks will need to consider their lending priorities with the climate lobby’s preferred policies and predictions in mind, whether or not those predictions are likely to happen.

That would mean reducing exposure to fossil fuels because President Biden has set a goal of eliminating carbon emissions from the power grid by 2035 and achieving a “net-zero" economy by 2050. Banks will also have to conduct a “climate-related scenario analysis"—don’t call them stress tests—that extend “beyond the financial institution’s typical strategic planning horizon" and account for potential losses in “extreme but plausible scenarios." Does this mean anticipating a melting Antarctica? What’s extreme and what’s plausible is far from clear.