The physical and transition climate change risk drivers are likely to generate significant costs and financial losses for banks and the banking system globally. Both banks and bank supervisors need to evaluate banks’ existing risk management policies, processes, and procedures to assess whether banks are sufficiently capitalized and liquid to cope with climate-change related risks. here
In 1980, the level of US corporate bonds outstanding was $468 billion, about 16% equivalent of U.S. Gross Domestic Product. Forty years later, the amount of corporate bonds outstanding has grown by over 2,000% to $10.6 trillion; this is 50% of equivalent of GDP. This level of corporate bond debt is the highest in the history of U.S. companies. here
The low interest rate environment in the United States and significant competition amongst banks and other lenders continues to feed into the leveraged loan approval frenzy. $308 billion gross institutional loans were issued the first quarter of this year; this is nearly triple the issuance the last quarter of 2020, $116 billion and significantly above the previous high of $202 billion the first quarter of 2020. here
Addressing climate-change related risks and how they can impact financial institutions is a significant priority in this year’s Group of 20 (G20) presidency. In a letter sent to the G20 Finance Ministers and Central Bank Governors ahead of their April 7 meeting, Financial Stability Board (FSB) Chair Randal Quarles stated that addressing issues related to climate change “is essential to a sustainable recovery from the COVID Event and beyond.” here
Sustained economic recovery is not coming to Latin America until government leaders can get COVID under control. However, it is important for investors to focus not only on near-term COVID vaccination and economic challenges. Precisely because Latin America has lagged other emerging market regions in the economic recovery, with good credit and market risks due diligence, investors can find good opportunities in Latin American fixed income, equity, and foreign exchange markets.
Eleven years since numerous bank reforms were approved in key banking centers globally, gaps remain in completing reform measures to end the threat that can be posed by Too Big To Fail (TBTF) systemically important banks (SIBs). Given the severity of the Covid crisis and the uncertainty surrounding when it will end, completing these Group of 20 (G20) endorsed reforms should be a priority for legislators and financial regulators globally.
The severe disruptive effects of Covid-19 on banks’ activities, have made identifying, measuring, controlling, and monitoring operational risk at banks more important than ever. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
Looming Corporate Credit Losses Will Be Absorbed By Financial Institutions And Possibly Even By Taxpayers
Corporate insolvencies, bankruptcies, and credit losses to financial institutions are just starting to be felt. The looming increase in corporate bankruptcies will generate credit losses that will need to be absorbed, either by the financial system or by taxpayers here.
Bank regulators globally should develop climate change-related regulations to insure financial stability. Under the President Joe Biden administration, there is no doubt that focusing on climate change is a national priority.
A More Balanced Regulatory Framework Is Needed To Achieve A Level Playing Field For Banks, BigTech, And FinTech
Both activity-based and entity-based regulations are needed for BigTech and FinTech to level the playing field. While there is a debate as to whether regulations should be activity-based or entity-based, I believe that there is a strong case for relying more, and not less, on entity-based rules for BigTech companies. here.
A report released today by Truth in Accounting, a nonpartisan government accounting watchdog, showed that in America’s most populous cities, New York City ranks 75th in fiscal health for the fifth year in a row. here
All U.S. Bank Regulators Should Require Banks To Incorporate Climate Change Risks Into Their Risk Management Frameworks And Disclosures
It is imperative that banks incorporate climate change risks in every aspect of their day-to-day risk management so that they are adequately capitalized and liquid to sustain unexpected losses, and so that they do not pose a threat to financial stability or to the communities they operate in. here.
According to a study released yesterday by the Americans for Financial Reform, The Center For Popular Democracy, and United For Respect, private equity-owned retailers slashed over half a million jobs even before the pandemic. “They cost nearly 542,000 jobs and closed nearly 18,000 stores by February 2020.” Total job losses have been substantial and widespread with more than 10,000 retail jobs lost in 20 states and more than 30,000 jobs lost in California, Florida, and New York. here
Financial Stability Oversight Council Is Missing An Opportunity To Enhance Preparedness And Response To Financial Stability Risks
In analyzing the leveraged lending and Collateralized Loan Obligation (CLO) markets, the U.S. Government Accountability Office found there are more opportunities for the Financial Stability Oversight Council (FSOC) to prepare and respond to financial stability threats. FSOC has been monitoring risks that arise in the leveraged lending market, through its monthly Systemic Risk Committee meetings. In its report released today, the GAO stated that “FSOC does not conduct tabletop or similar scenario-based exercises where participants discuss roles and responses to hypothetical emergency scenarios. As a result, FSOC is missing an opportunity to enhance preparedness and test members’ coordinated response to financial stability risks.” Thus far, FSOC has not publicly agreed with the GAO’s recommendation to conduct tabletop exercises. here
The pandemic has exposed many vulnerabilities and challenges that the United States needs to confront immediately. On a daily basis, I see those vulnerabilities in the area of financial literacy, that is, knowledge about earnings, expenditures, savings, investments, and long-term financial planning. According to studies compiled by the U.S. Financial Literacy and Education Commission, only one-third of adults could answer at least four of five financial literacy questions on fundamental concepts such as mortgages, interest rates, inflation and risk. here
For decades, numerous academics, consumer advocates, and legislators have pointed out the importance of consumer credit scores on individuals’ ability not only to obtain credit, but also on housing and loan affordability. The fact that the three credit reporting companies, Equifax, Experian, and Transunion, are practically an unregulated and unsupervised oligopoly, has led to a system that has had a destructive impact on millions of Americans and which is in dire need of reform for the good of all our country.