WASHINGTON — Federal regulators first warned in an annual report to Congress on Friday that climate change was an “emerging threat” to the U.S. financial system, explaining how the costs associated with more hurricanes, wildfires and flooding caused by global warming. Earth could lead to a cascade of damage throughout the economy.
The Financial Stability Oversight Council, a group of leading financial regulators led by the Secretary of the Treasury, offered a stark assessment of how the effects of rising temperatures could spread, hurt real estate values and hurt insurers, banks and pensions. associated with the sector can incur heavy losses. The report follows a similar analysis of climate risks released by the council in October.
“Increased frequency and severity of acute physical risk events and longer-term chronic phenomena associated with climate change are expected to lead to increased economic and financial costs,” the new document said.
However, the report didn’t stop with the kinds of policies that environmental groups and progressive Democrats have been calling for, such as stricter rules requiring banks to assess their ability to withstand climate-related losses, new capital requirements or restrictions on extending financing to fossil fuels. fuel companies. Instead, it echoed a series of recommendations from the October report calling for improved data for evaluating climate-related financial risks and more unified disclosure requirements to help investors make more informed decisions.
Climate change was not mentioned in the Trump administration’s final FSOC report last year.
The warning about climate change was one of many looming threats to the financial system, which has been confronted for nearly two years in a global pandemic with ongoing uncertainty gripped by a new variant.
What you need to know about inflation in the US
In its annual report, the panel also warned of the risk of higher-than-expected inflation, suggesting it would lead to higher interest rates and losses at some financial institutions, weakening the momentum of the recovery.
The report comes as the Federal Reserve said this week it would accelerate the end of its monthly bond-buying program, which it has used to support economic growth during the pandemic, and raise interest rates three times next year to fight inflation.
The FSOC regulators attributed inflation in advanced economies to “a rise in commodity prices, supply chain disruptions and labor shortages”. They warned that a rapid or unexpected rise in interest rates to dampen rising prices could trigger “sharp contractions” and acknowledged that it was unclear how long inflation would last.
“The advent of higher inflation also raises the question of whether longer-term household and corporate inflation expectations will rise or become unanchored,” the report said.
The trajectory of the global economy is also a concern, as lockdowns and downturns in other countries could spill over into the US financial system. Regulators specifically pointed to the prospect of a “hard landing” in China as a potential concern, noting that China’s real estate sector is “heavily used”. A slowdown in the real estate market there could hurt global commodity markets because China is such a major consumer of steel, copper and iron ore.
Frequently asked questions about inflation
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual price change for everyday goods and services such as food, furniture, clothing, transportation costs, and toys.
The report also highlighted the fact that the pandemic has ushered in changes in the economy that are still difficult to comprehend.
For example, the FSOC is closely monitoring the commercial real estate sector, citing concerns that the rise of telecommuting could permanently shift demand for office space in cities. If at some point this shift leads to a rapid fall in valuations, it could be a blow to small and medium-sized banks that hold real estate loans and destabilize the financial system.
Corporate credit also remains a concern, with leverage in non-financial corporations being higher than in the past. Regulators are monitoring the aviation, hospitality and restaurant sectors, which have been hit hard by the pandemic, and warned that a wave of defaults or downgrades could be difficult for the financial sector to absorb.
The financial system also faces a series of new threats.
Digital assets, known as stablecoins, are another potential source of vulnerability, regulators said, adding that more coordinated oversight is needed because the industry is evolving so quickly. They said the value of digital assets remained highly volatile and they could be subject to “the risk of operational failure, fraud and market manipulation.”
The new technology could pose risks to the wider financial system if digital currency investors are suddenly unable to cash in on them. The regulators also said stablecoins could pose risks related to cybersecurity and illegal financing.
The FSOC has no regulatory power, but can direct regulators to address market vulnerabilities, and has the power to designate certain entities or activities as “systemic” and in need of closer oversight.