WASHINGTON – Federal regulators first warned in an annual report to Congress on Friday that climate change is a “new threat” to the US financial system, explaining how costs associated with more hurricanes, wildfires, and floods caused by global warming could lead to a cascade of damage throughout the economy.
The Financial Stability Oversight Board, a group of leading financial regulators led by the finance minister, has offered a bleak assessment of how the effects of rising temperatures could spread, damaging property values and burdening insurers, banks and pension systems that are tied to a heavy sector of the economy. losses. The report follows a similar analysis of climate risks published by the council in October.
“The increased frequency and severity of acute somatic risk events and long-term chronic climate change events are expected to increase economic and financial costs,” the new document says.
However, the report does not mention the kind of policy prescriptions called for by environmental groups and progressive democrats, such as tougher rules requiring banks to assess their ability to withstand climate-related losses, new capital requirements, or restrictions on expanding fossil finance. fuel. fuel companies. Instead, he echoed a series of recommendations from the October report that called for better data to assess financial climate-related risks and more uniform disclosure requirements to help investors make better decisions.
Last year, there was no mention of climate change in the Trump administration’s final FSOC report.
Climate change warning was one of several looming threats to the financial system, which faces continued uncertainty nearly two years after the outbreak of a global pandemic gripped by the new variant.
What you need to know about US inflation
In its annual report, the commission also issued a warning about the risk of higher-than-expected inflation, suggesting that this would lead to higher interest rates and losses in some financial institutions, dampening the momentum of the recovery.
In a report, the Federal Reserve said this week that it will accelerate the completion of its monthly bond-buying program, which it used to support economic growth during the pandemic, and will raise interest rates three times next year to fight inflation.
FSOC regulators attributed inflation in advanced economies to “rising commodity prices, supply chain disruptions and labor shortages.” They warned that rapid or unexpected hikes in interest rates to curb price increases could trigger “dramatic restraining forces,” and acknowledged that it is unclear how long inflation will persist.
“The emergence of higher inflation also raises the question of whether long-term inflation expectations of households and businesses will rise or become redundant,” the report said.
The trajectory of the global economy is also troubling as constraints and downturns in other countries could spill over to the US financial system. Regulators highlighted the prospect of a “hard landing” in China as a potential concern and noted that China’s real estate sector is “heavily borrowed.” A downturn in the real estate market could hurt global commodity markets as China is a large consumer of steel, copper and iron ore.
What is inflation? Inflation is the loss of purchasing power over time, which means your dollar won’t go as far tomorrow as it does today. It is usually expressed as the annual change in the prices of everyday goods and services such as food, furniture, clothing, transportation and toys.
The report also highlights the fact that the pandemic has brought about changes in the economy that are still difficult to understand.
FSOC is monitoring the commercial real estate sector closely, for example, for fear that the rise of teleworking could permanently displace demand from office space in cities. If this shift at some point leads to a rapid drop in valuations, it could hit the small and medium-sized banks that hold real estate loans and destabilize the financial system.
Corporate credit also remains a concern as the debt burden of non-financial corporations is higher than in the past. Regulators are watching the airlines, hospitality and restaurant businesses hit hard by the pandemic and warn that the financial sector will find it difficult to cope with the wave of defaults or downgrades.
The financial system is also facing many new threats.
Regulators have said digital assets, known as stablecoins, are another potential source of vulnerability, adding that more coordinated oversight is needed as the sector is evolving very rapidly. They stated that the value of digital assets remains highly volatile and that they may be subject to “the risk of operational disruption, fraud and market manipulation.”
New technology could pose risks to the financial system as a whole if digital currency investors are suddenly unable to cash out. Regulators have also said stablecoins can pose risks associated with cybersecurity and illicit financing.
The FSOC does not have the authority to write rules, but it can encourage regulators to address market vulnerabilities, and it also has the power to designate certain organizations or activities as “systemic” and requiring more stringent oversight.