"Graph With Stacks Of Coins" by Ken Teegardin is licensed under CC BY-SA 2.0

In an op-ed published in The Hill yesterday, ATR Federal Affairs Manager Bryan Bashur points out how mandating banks to take green factors into consideration will increase borrowing costs for households and businesses and slow economic growth.

The Biden administration and left-wing groups support the more stringent requirements on banks to account for green factors even if it means increasing the cost of borrowing. As Bashur explains:

The Biden administration shares this myopic point of view, that the federal government should mandate what factors private lenders should take into consideration. They even admit that “Certain actions to address climate-related financial risks could impact financially vulnerable communities in the form of higher insurance and credit costs or the inability to obtain insurance or credit.” The costs associated with mandating the consideration of green factors have the potential to negatively impact Americans who need capital the most.

Government mandates to consider green factors also assumes that banks are not already taking these risks into consideration. In fact, these risks are already accounted for in determining a borrower’s credit risk. As Bashur explains:

Financial products are already incorporating green factors into contract agreements. One study shows that the municipal bond market already accounts for green factors, without the need for the government to require banks and their counterparties to take it into consideration. According to the study, counties accounting for green factors issue bonds that “on average pay 3.03 percent in total annualized costs” whereas “non-climate counties” pay 2.95 percent. Requiring banks to comply with additional disclosures and stricter capital requirements specifically to account for green factors is redundant, risks limiting the amount of financing businesses can receive and increases their costs of borrowing.

Sarah Bloom Raskin, Biden’s pick to serve as vice chair for supervision on the board of the Federal Reserve, will impose these burdensome green factors on banks by either requiring them to be included in stress testing or potentially labeling loans to traditional energy producers as riskier and thus tighten capital requirements on banks. These actions will reduce the availability of private credit and slow economic growth. Bashur highlights that:

Biden’s nominee to serve as vice chair for supervision on the board of the Federal Reserve, Sarah Bloom Raskin, will threaten to limit the availability of affordable credit by requiring banks to undergo more strenuous stress testing and alter capital requirements to account for green factors. Discriminating against traditional energy production by altering the methodology for how banks calculate the risk of their asset holdings will make the United States’ banking system more expensive for borrowers, reduce bank competition and force banks to take on more risk. All these factors lead to slower economic growth. 

In 2018, the Federal Reserve Bank of Philadelphia published a paper highlighting the adverse effects of more stringent capital requirements. The paper found that “for every 1 percent increase in capital minimums, lending rates will rise by 5 to 15 basis points and economic output will fall 0.15 percent to 0.6 percent.” It also makes clear that the increase in borrowing costs from these requirements could stymie enough financing “to create a lasting drag on overall economic activity.”

Green factors are also extremely difficult to quantify. Bashur underscores that:

Another flaw in accounting for green factors is the difference between the length of time for calculating it versus the credit and operational risks of a bank loan. BIS admits in their climate report that “time horizons over which climate risks manifest present a considerable challenge for risk quantification.” The report states that strategic planning at banks is over a three-to-five-year timeframe while “physical climate risks are expected to increase in materiality over a much longer horizon.” 

If there are risks, they would take nearly half a century to impact a bank’s portfolio. This mismatch makes it nearly impossible to quantify green factors for banks. Requiring banks to disclose this information is also incredibly burdensome, increases compliance costs and will more than likely make lending more expensive for individuals and small businesses. It is unreasonable to force banks to predict how risks that appear 30 to 50 years down the road will negatively impact their capital reserves and overall stability.

Bashur concludes that forcing banks to adhere to stricter rules to account for green factors “is a surefire way to slow economic growth just as the United States is emerging from a pandemic and facing price increases not seen in nearly 40 years.”

Click here to read the full op-ed.