Forcing climate mandates on banks will stifle access to affordable credit

President Biden’s administration-wide effort to mandate the consideration of green factors in the financial sector will increase the cost of borrowing for households and businesses while also slowing economic growth.  

Now that inflation is at its highest levels since the 1980s and the Federal Reserve is expected to begin a series of interest rate hikes, the Biden administration should avoid implementing new policies that increase the cost of private lending for households and businesses. Increasing the cost of private financing could lead to future economic recession. 

Groups advocating to impose more stringent supervisory requirements on banks to account for green factors fail to take into consideration the significant increase in lending costs that come with it. 

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. 

This also assumes that banks are not already taking certain risks into consideration. 

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. 

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.” 

The Bank for International Settlements (BIS) also explicitly states that more stringent capital requirements force banks to reduce credit availability or increase lending rates, “which in turn, may slow down economic growth or, even worse, deepen an economic recession.” 

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. 

As the Federal Reserve anticipates raising the federal funds rate in March, it is imperative that federal financial regulators do not impose duplicative regulatory measures that will force banks to hold onto additional capital and increase borrowing rates for businesses in all sectors of the economy. Restricting banks’ ability to disburse capital 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. 

Fixing this downturn requires putting the right people in the right positions who will focus on achieving price stability and maximum employment to ensure future economic growth. 

Bryan Bashur is a federal affairs manager at Americans for Tax Reform and executive director of the Shareholder Advocacy Forum.