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Senate Bill Would Extend Bank Stress Tests to Climate Risk

Nov. 8, 2019, 5:59 PM

What are banks and big financial institutions doing to protect investors from mammoth risks to rising sea levels and other climate change impacts?

Not enough, says Sen. Brian Schatz (D-Hawaii), who is readying legislation that would direct large banks and other financial institutions to conduct stress tests to gauge whether they are well-positioned to absorb climate change risks.

Schatz, tapped in March to chair a Democrats-only Special Committee on the Climate Crisis as a way to raise the profile of the climate issue, told Bloomberg Environment the tests would handle “various shock scenarios.”

Stress tests are run to determine whether banks are capitalized enough to handle severe economic shocks—but currently not climate risks. Banks have been subject to the tests in the aftermath of last decade’s global financial crisis.

“Our view is that risk is, well, risk,” Schatz said, and that climate impacts, including rising temperatures and increasingly severe storms, should be weighed by financial institutions. Schatz didn’t offer many details but plans to unveil the legislation in the coming weeks.

Potential costs to the U.S. from climate impacts “could be significant and unevenly distributed across sectors and regions,” a 2017 Government Accountability Office report said, including $4 billion to $6 billion between 2020 and 2039 in annual coastal property damages from sea level rise and more frequent and intense storms.

Republican Views

Schatz, who sits on the Senate Banking Committee, isn’t optimistic he’ll get much Republican support.

“I do think there’s a bunch of work being done among the regulators and on the international level,” he said. “But I don’t have any illusions of getting Republican support in this political environment,” he said.

Broad climate legislation is likely to remain stalled at least until after the 2020 election, when Democrats hope to win Senate control.

Sen. Lisa Murkowski (R-Alaska), chairman of the Senate Energy and Natural Resources Committee, said the concept is intriguing, in part because of the rapid growth in retirement investments through 401(k) funds, where more than 100 million Americans have invested trillions of dollars.

“We don’t even know” the degree to which those investments could be affected by climate vulnerability, Murkowski said.

“Is it a fair discussion? Yeah,” she said, but she warned the issue is complex.

“What would that stress test actually look like? It would certainly be very different depending on where you are in the country, and the exposure that you have to different things, whether it’s increased tornado activity in-shore, or increased hurricane along the coasts,” Murkowski said. “But I do think it’s something that’s in the mix for a conversation.”

Several Republicans on the Banking Committee, including Sen. Pat Toomey (R-Pa.), poured cold water on the idea. “Not something I have given any thought to,” Toomey said.

Sen. Mitt Romney (R-Utah), who isn’t on the banking panel but has backed some climate action, including keeping the U.S. in the Paris climate accord, was also skeptical. “I can tell you that’s not something I am considering at this point,” he said.

Protecting Investors

Sen. Marco Rubio (R-Fla.), who has warned that the 30-year home mortgage could disappear in low-lying parts of his state becauuse of rising sea levels, said a more immediate concern is making sure the insurance industry can absorb increased property risk while keeping premiums affordable.

“The first group that would have to face that would be the insurance industry, who are already beginning to price that” risk into Florida premiums, he said.

Rubio said he’d have to know more about a broader stress test requirement and its implications for banks and other financial institutions. “But I imagine it’s one of various things that we are going to have to confront here in the years to come,” he said.

Like nearly all congressional Republicans, Rubio has opposed most of the big legislative proposals around climate change that some Democrats have backed, such as the Green New Deal, arguing they would damage Florida’s economy.

European Evidence

Schatz also pointed to efforts from central banks in Western Europe to develop climate stress tests for financial institutions.

“Their thoughtful approach on handling the material risks climate change poses, however, is in direct contrast to U.S. regulators, who have chosen to ignore it.”

Senate Democrats on the Banking Committee say a climate stress test for the financial system, similar to the EU’s efforts, deserves a close look, particularly given the long-term nature of retirement funds.

“If you are looking out for your long-term value, particularly for pension holders, this would be a totally relevant question,” said Sen. Mark Warner (D-Va.).

To contact the reporter on this story: Dean Scott in Washington at dscott@bloombergenvironment.com

To contact the editors responsible for this story: Gregory Henderson at ghenderson@bloombergenvironment.com; Rob Tricchinelli at rtricchinelli@bloombergenvironment.com