Biden’s choice for banking supervision is fueling the climate debate

A little-known Treasury office has become the latest focal point in the debate about how best to protect the US financial system from future risks, including climate change.

The battle for the office – officially known as the Office of the Comptroller of the Currency – began last month when President Biden Saule Omarova, a well-known Wall Street critic, nominated to lead the agency.

Omarova, a law professor at Cornell University since 2014, warns of the long-term financial risk of fossil fuel companies. She also called for a new federal agency to invest in projects that would support “socially inclusive and sustainable economic growth,” a paper She wrote last year.

Several elements of Omarova’s approach to financial regulation have generated sharp reactions from some quarters. Republican lawmakers and industry groups say Omarova advocated “radical” political ideas that would fundamentally – and dangerously – overhaul the banking system. Many reject their nomination.

The stakes are substantial. The Office of the Comptroller of the Currency oversees the US banking system and helps ensure that the largest US banks operate “safely and soundly”. This responsibility takes various forms. Including: overseeing the largest lenders to ensure they actively address emerging threats to the financial sector.

It is currently unclear whether the narrowly divided Senate will approve Omarova’s new role as head of the office of currency auditor. However, one expert said Omarowa’s approach was well suited to the position.

“Saule Omarova is generally very sensitive to systemic risk, she knows very well how risks that permeate the entire financial system can weigh on the entire financial system,” said Hilary Allen, American University law professor who specializes in financial regulation.

“So I expect her to be very aware of every threat to the financial system as a whole,” added Allen, “and I think climate change is one of them.

Financial supervision

What exactly is the Office of the Auditor of the Currency? And what does that have to do with global warming?

Founded in the mid-19th century, the agency is an independent bureau of the Treasury that works with the Federal Reserve and the Federal Deposit Insurance Corp. is tasked with overseeing the US banking sector.

“The OCC comprised the stake in the industry, the national banks and federal savings banks, whose statutes – their operating license – were issued by the federal government,” said Karen Solomon, a former high-ranking official of the Office of the Comptroller of the Currency and current Chief of Counsel at Covington & Burling LLP, a law firm.

In order to fulfill this role, a number of regulatory activities need to be carried out, many of which are carried out in coordination with the Fed and FDIC, as well as international standard setters.

This includes banking supervision, regulation of loan portfolios and assistance in conducting stress tests that measure the ability of companies to stay afloat in the face of unexpected economic shocks. Also vital is the Agency’s role in identifying and developing policies to ensure banks have sufficient capital to protect them from losses that could arise from emerging risks.

Many of these activities, according to a growing coalition of proponents and experts, could and should eventually take into account climate-related risks such as extreme weather events and the move away from fossil fuels.

Just last week, advocates called agencies, including the auditor’s office, to immediately include “climate risks” in their regular corporate reviews.

A critical first step, said groups including the Natural Resources Defense Council and Public Citizen, would be to issue “regulatory guidelines that detail specific issues that are expected of banks and their auditors”.

“What oversight is essentially is that auditors review – in a confidential manner – a bank’s papers, policies and procedures, and loan portfolios to ensure that the bank is operating safely and soundly,” said Yevgeny Shrago, a political advisor of Public Citizen’s climate program.

If “you think climate change is posing a risk to banking operations, either through physical or transitional risks,” added Shrago, “then it is important that auditors try to understand how the bank is dealing with these issues.”

It is noteworthy that the auditor’s office is already moving in this direction.

Acting auditor Michael Hsu said in a speech last month that under his leadership, the office “is focused on developing effective climate risk management guidelines for large banks and working with our cross-agency colleagues”.

Opposition to Omarova

Solomon, the former OCC official, said that when it comes to climate-related financial regulation, there is little question of where the agencies are going as the issue grows in the Office of the Comptroller of the Currency in the United States and around the world the world moves into focus.

“On the climate issue,” said Solomon, “it seems to me that the OCC leadership wants to promote climate change policies like those promoted by the [Biden] Administration.”

Nonetheless, Solomon emphasized, “it is of great importance who is sitting in which chair.”

It is difficult to say where Omarova stands on concrete political ideas to protect the banking sector from climate-related risks. “She’s never been climate-conscious about her work,” said Robert Hockett, a Cornell University law professor who has worked closely with Omarova for the past decade.

Omarova has, in a sense, commented on the issue. For example, last year she wrote a paper argues that Congress should establish a National Investment Authority to implement a long-term strategy for economic development. The NIA would aim to fill “the institutional void” between the Treasury Department and the Federal Reserve to pour dollars into projects, including climate-related ones, that are not funded.

And in 2020, when Wells Fargo & Co. and JPMorgan Chase & Co. suffered huge losses in the first few months of the COVID-19 pandemic, partly due to failed loans to struggling fossil fuel companies, Omarova said in an interview with E&E News that the losses “crystallize” the long-term risks of the oil, gas and pipeline industry (Climate wire, July 17, 2020).

Even so, Omarova has not made her position clear on issues such as climate-related banking supervision, stress tests and the like.

That doesn’t seem to bother the financially minded environmentalists – who cite her time at Cornell, her previous roles as special advisor in the Treasury Department to President George W. Bush, and her tenure with Davis Polk law firm as evidence that she is highly qualified for the role. The Sierra Club and Evergreen Action were among those who welcomed Biden’s election and urged the Senate to ratify Omarova as soon as possible.

“The auditor plays an essential role in preventing a climate-related economic disaster from destroying our entire financial system,” said Jamal Raad, executive director of Evergreen Action, in a statement. “In nominating Saule Omarova, President Biden selected someone who is not afraid to take on Wall Street and who has supported bold federal investments in clean energy to protect the climate.”

Republican lawmakers and industry groups have raised concerns, however. The Chamber of Commerce, the American Bankers Association, the Independent Community Bankers of America, and Senator Pat Toomey (R-Pa.) – the chairman of the committee that will review Omarowa’s nomination – have criticized various ideas put forward by Omarova in previous academic papers.

“MS. Omarova has called for a” radical reshaping of the fundamental architecture and dynamics of modern finance, “including the nationalization of retail banking and Federal Reserve lending,” Toomey said in a statement. “She also advocated an ‘effective end ‘used[ing] Banking as we know it. ‘”

The chamber took on a similar tone. The trade group said in a statement that it “strongly opposes” Omarowa’s nomination because its “academic writings are outside the mainstream of any major political party and, if implemented, would result in an almost complete takeover of banking by the government” .

Neither the ABA nor the Bank Policy Institute responded on record to questions about their stance on Omarova or on climate-related regulation in general.

Omarowa’s supporters pushed back the dispute. They say the articles Omarova’s critics cited are academic thought experiments – not serious political proposals that shed light on how Omarova would approach her work in the auditor’s office.

In addition, these ideas “actually have nothing to do with the mission of the OCC,” said Allen, the American University professor. “I think this was taken as a disappointment to cover up the fact that the real concern for her is that she will be tough on the banks and keep the financial system safe and sound.”

Allen said that this approach would represent a significant departure from the bureau’s “customer story” of “expanding banking” and “serving banks as customers”.

Hockett, who co-authored many of Omarova’s papers, agreed. He said he believed the industry was concerned about Omarova’s research highlighting the risks that cryptocurrencies, financial technology companies, and other trends pose to economic stability.

According to the law firm Gibson Dunn, a recurring theme in Omarova’s work is that banking regulation is too tightly geared to “micro” problems and solutions, and that a new regulatory paradigm is geared towards broader “macro” economic and common good goals and significantly increased government intervention in the financial sector, may be required. “

In this way, said Hockett, “Omarova’s critics know that their work on the subject is not really objectionable. It’s just things that they don’t like because it shows that she is in favor of regulating them. “

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