Unsecured Fossil Fuel Investment Risks Global Financial Crisis: Letter

Unsecured investments in fossil fuels threaten the economy at large: letter Big banks risk failure reminiscent of 2008 financial crisis because of their continued investments in oil and gas development, which are at odds with commitments climate change, warns an international group of academics and advocates.

The open letter from the Brussels watchdog group Finance Watch calls on national financial regulators like the Federal Reserve to demand that banks hold more liquidity to offset loans to all oil and gas developments, especially new ones.

New developments in fossil fuels are risky because the world already produces more fossil fuels than it can safely burn. At least 60 percent of oil and natural gas, as well as 90 percent of coal, must stay in the ground to keep warming below 1.5 degrees Celsius above pre-industrial levels, according to a September study in Nature.

This means that any new investment in fossil fuels should be treated as a high-risk investment, and every dollar invested in these projects should be matched by a dollar in cash reserves, both to mitigate climate risks and their risks. loan portfolios, Benoit Lallemand of Finance Watch told The Hill.

“The risk is so high that you should assume that 100% of these assets could be lost,” Lallemand said, following the rules that regulators already require for other high-risk investments, like private equity loans. .

The Hill has contacted the American Bankers Association for comment.

Currently, banks typically only hold about 8 cents for every dollar loaned to new or existing fossil fuel developments, putting them at serious risk if those assets are “stranded,” Lallemand said.

Stranded assets are capital stuck in investments that no one wants to buy – which can happen suddenly, like on September 15, 2008, when the sudden collapse of the Lehman Brothers company triggered a market panic that rocked finance. world in a financial crisis.

“Finance is based on expectations, and if the risks materialize beyond anyone’s expectations, you will have some level of panic in the market,” said Philip Basil, director of banking policy at advocacy group Better. Markets – a signatory of the letter.

Before Lehman’s collapse, Basil said, many people knew the financial system was deeply invested in high-risk financial products, like the infamous mortgage-backed securities and credit default swaps.

But expectations still fell short of what turned out to be reality – with disastrous results, Basil noted. The Lehman collapse suddenly revealed to traders, bankers and investors that conditions were “considerably worse than previously thought, and expectations fundamentally changed,” which accelerated the stock market crash.

That kind of traumatic surprise – a “Lehman moment” – is what Finance Watch and its signatories want regulators to avoid.

There are many potential triggers for such an event, Basil said: a series of acute climate disasters, a rapid increase in warming, or a revelation that new developments are a sunk cost, because there is no market for all. the reserves of fossil fuels in the ground.

But the potential outcome is the same, if the banks don’t have enough cash on hand to compensate for sudden losses. “Suddenly people panic and the market panics. And then you could have the kind of rapid deterioration not only in asset prices but in economic activity that we saw in 2008. ”Basil told Equilibrium.

Finance Watch’s Lallemand argued it could even be worse – and not just because taxpayers might end up with the bag again. Policymakers will be under pressure to respond to a financial crisis at the same time as they deploy more resources to contain a worsening climate crisis and the resulting disasters, pandemics or water shortages.

“We say to regulators, ‘Don’t add a financial crisis to a climate crisis,” Lallemand said, because in an acute climate crisis, “your resources will be stretched to say the least”.

The proposed regulations are relatively “common sense,” Lallemand said: invested

This is not a “moon request from an NGO,” Lallemand said. “We don’t want to hijack prudential regulations to make a green transition. We just want prudential regulators to use the system consistently, ”treating climate risk as they would other forms of risk.

But while the European Central Bank and the Bank of England are in the early stages of exploring capital needs for fossil fuel investments, in the United States the issue remains controversial, with Senate Republicans arguing that financial regulators do not have the mandate to address such “bitterly partisan issues”.

The prospect of monitoring environmental, social and governance matters like climate change “has inserted the Federal Reserve into the emotional political arena – a place the Federal Reserve has rarely ventured into, and for good. reason “, Sen. Pat ToomeyPatrick (Pat) Joseph Toomey Black Women Seek To Reap Gains In Upcoming Election Watch Live: GOP Senators Introduce New Infrastructure Proposal Sasse Rebuilt By Nebraska Republican Party For Impeachment Vote MORE (R-Pa.), The Republican ranked on the US Senate Banking Committee, said in a letter to the Federal Reserve in San Francisco.

But climate advocates argue that the emergence of politicization – a key concern of regulators like the Treasury Secretary Janet YellenJanet Louise YellenElon Musk tears up Democratic billionaire tax plan Billionaire tax is gaining ground The No Surprises Act: a long overdue bill and Federal Reserve Chairman Jerome Powell is the reverse of the real problem.

“The role that we need from financial regulators is to help depoliticize this problem,” said Kathleen Brophy, activist for the Sunrise Project, who signed the letter to Finance Watch.

Instead of treating climate change as a policy, “we need them to enhance and give credibility to the economic and financial arguments for getting the United States out of fossil fuels. Their role is not to let themselves be paralyzed by politics but to lead in their field, ”she said.

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