U.S. globally systemically important banks are very exposed to climate change risks. Financial regulators must act now. Inaction will be very costly. Read more here.
Climate change events are significant drivers of rising credit, market, operational and liquidity risks in banks and what are referred to as shadow banking, non-banks, or Other Financial Institutions (OFIs): insurance companies, pension funds, asset managers, broker dealers, securities firms, hedge funds, home offices, and private equity firms Read More
Financial Institutions Are On Notice That Weak Governance Can Lead To Ratings Downgrades And Significant Fines
Fitch Ratings analysts expect that “idiosyncratic governance weaknesses to weigh on ratings more often than previously as the tolerance of governance failures from a wide range of stakeholders (e.g. authorities, investors, creditors, customers and employees) declines.” Read more here.
The default rate for below investment grade debt has declined to its lowest level since October 2019. The fact that the default rate for this type of debt, also known as high yield or junk bonds, is declining significantly is signaling an improvement in the credit quality of corporations, that are typically very indebted. Read more here
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. Read more 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. Read more 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. Read more 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.” Read more 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. Read more
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. Read more
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. Read more
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 Read more 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. Read More
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. Read more 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. Read more 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. Read more here.