They’re at it again. Thierry Philipponnat, an influential member of the board of France’s financial regulator, L’Autorité des Marchés Financiers, says banks should be forced to hike capital and collateral requirements when they lend to fossil fuel firms on the theory that the default risks are higher than the banks think it is. And the IMF and others seem to agree. The main risks, in this case, being that the IMF and financial regulators might start imposing misguided new regulations that make investments in fossil more likely to default. Shareholders beware.
The Financial Times explains that Philipponnat’s proposal “would make them [banks] treat fossil fuel lending in the same way as other risky investments, increasing their capital requirements to insulate them against possible losses. Banks would therefore have more protection against the risk of carbon assets becoming ‘stranded’ if demand falls — or the risk of costly climate disruption if it does not.” Or, unstated but far more likely, if the regulators impose such onerous regulations that the industries in question cease operating, further stifling an economy already in trouble.
Philipponnat is a significant figure. He’s also on the board of the Autorité de Contrôle Prudentiel et de Résolution, the supervisory body for French banking and insurance. And in a rather neat circle, his paper was written for an “advocacy group” called Finance Watch, which it turns out Philipponnat founded, and “Finance Watch estimates that climate-related risks to the financial system are greater than those posed by pandemics, such as coronavirus.” They would, wouldn’t they? But it’s hard to argue that since governments and pundits nailed the risks of pandemics, and the response, we should certainly let them cripple investment in the key source of power in the modern world.
Despite the rather obvious risks involved, this theory is all the rage among people it makes sound smart. The supposedly sober IMF also thinks dopey investors are “ignoring climate change risks.”
Meanwhile Politico warns us that “U.S. taxpayers could be on the hook for billions of dollars in climate-related property losses as the government backs a growing number of mortgages on homes in the path of floods, fires and extreme weather. Violent storms and sunny-day flooding are on the rise, and more houses are being built on at-risk land. But fewer people are buying federally backed flood insurance despite requirements that homeowners in flood plains be insured if their mortgage is backed by taxpayers.”
This story is more plausible. And a useful corrective to the others, because the idea governments might be taking foolish risks with other people’s money is more credible than that private firms might be doing so with their own, as a matter of theory and of experience. At least it would be a useful corrective if Politico did not go on to say “In short, the government’s biggest housing subsidies — mortgage guarantees and flood insurance — are on course to hit taxpayers and the housing market as the effects of climate change worsen, a POLITICO analysis finds”. The problem here is that extreme weather is not increasing.
OK, it’s one problem. The other is the claim that “’Where catastrophe happens and physical climate really manifests itself, the public tab will end up carrying this,’ said Ivan Frishberg, vice president for sustainability banking with Amalgamated Bank” and “That scenario has a growing collection of finance experts, progressives and congressional Democrats pressuring financial institutions and their regulators to give more weight to the systemic risks of climate change.”
The argument that government which is bungling things should make everybody else do what it wants is a bit hard to follow. But if the conclusion is that people with practical experience and skin in the game should be pushed aside by public-sector computer modelers, well, who doesn’t agree with that scenario? At least among those lacking practical experience and skin in the game.