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better markets
Report Warns 'Today's Climate Crisis Is Tomorrow's Banking Crisis'
"This growing unseen and unacknowledged banking crisis is going to become visible soon as the climate-related disasters and losses pile up and insurance companies continue to go bankrupt."
Aug 23, 2023
Insurance companies bankrupted by climate disasters are the "canaries in the coal mine" portending "a much worse banking crisis," and regulators must act with urgency to avert financial crashes and costly bailouts, a report published Wednesday warned.
Amid increasingly frequent and severe fires, flooding, hurricanes, tornadoes, landslides, and hail storms across the U.S., "it's no surprise that there is a great deal of attention on the burgeoning crisis among insurance companies and their insured individuals and businesses," says the report, which was published by the financial reform advocacy group Better Markets.
"The U.S. property and casualty industry suffered losses of $5 billion in 2021, which ballooned to losses of $26.5 billion in 2022," Better Markets notes. "There have already been 15 confirmed weather/climate disaster events with losses exceeding $1 billion each in the U.S. as of August 8, 2023, with losses almost certain to exceed 2022."
That tally notably does not include the Hawaiian island of Maui, where a wildfire spread by hurricane-force winds leveled Lahaina, killing at least 115 people and causing an estimated $5.52 billion in damage.
"The number of insurance companies going bankrupt, withdrawing from states, limiting coverage, and significantly raising premiums is increasing by the day," the publication continues. "In addition, the reinsurance market, which is key for insuring major climate events, is facing a reduced investor demand, which is going to decrease coverage while increasing costs even more."
"However, this isn't just a crisis for insurance companies and their customers," Better Markets stresses. "The ongoing and worsening insurance crisis is the leading edge of a coming banking and financial crisis."
According to the report:
While climate risk is tragic for homeowners and problematic for insurance companies, it is exponentially worse for banks and the financial system. That's because insurance companies limiting their losses do not eliminate the losses entirely; they merely shift losses to other entities like banks which have large and increasingly concentrated portfolios of loans and other credit instruments to those now uninsured or underinsured real estate properties and businesses. When the inevitable climate disasters occur, those exposures will quickly become realized losses, potentially at levels that will cause banks to collapse, and possibly ignite a credit contraction, precipitate contagion, and result in a banking crisis if not a financial crash.
"There's a major untold story behind the unprecedented climate disasters pummeling the country and capturing the headlines: Today's climate crisis is tomorrow's banking crisis," said report author and Better Markets CEO Dennis Kelleher, who criticized federal regulators' lack of action.
"The Financial Stability Oversight Council (FSOC) and banking regulators' response thus far have been grossly inadequate and inconsistent with the material climate risks bearing down on banks and the financial system," he argued. "For example, the FSOC member agencies were called on just two years ago to bolster the financial system's resilience to climate-related financial risks. Yet, since then, the actions have been slow and half-hearted."
"This growing unseen and unacknowledged banking crisis is going to become visible soon as the climate-related disasters and losses pile up and insurance companies continue to go bankrupt and stop insuring homes, businesses, cars, and other bank assets in state after state," Kelleher warned.
"Just as insurance companies are acting to limit their losses, the FSOC and other banking and financial regulators must require banks and financial firms to assess their exposure to those losses and have an action plan to mitigate them before they materialize and cause banking crisis," he added. "Climate disasters are bad enough; a banking disaster on top of that will make everything much worse."
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Warren, Watchdogs Demand Independent Probes of Fed Role in Bank Failures
"Fed Chair Powell's actions directly contributed to these bank failures," said Sen. Elizabeth Warren. "For the Fed's inquiry to have credibility, Powell must recuse himself from this internal review."
Mar 14, 2023
Sen. Elizabeth Warren joined financial industry watchdogs Tuesday in demanding an independent investigation of the Federal Reserve's role in two of the largest bank collapses in U.S. history, failures that experts say were caused in part by the deregulatory actions of Congress and the central bank.
After joining the Treasury Department on Sunday in launching an extraordinary intervention to backstop the financial industry and prevent systemic fallout from the collapse of Silicon Valley Bank (SVB) and Signature Bank, the Fed announced that Michael Barr—the central bank's vice chair for supervision—would undertake a "review of the supervision and regulation of SVB."
The Fed said the results of its internal investigation will be made public by May 1.
In a statement, Fed Chair Jerome Powell said that "the events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve," which was the primary regulator of SVB.
But Warren (D-Mass.) argued in a tweet that Powell shouldn't play a role in the probe given his record of weakening the Fed's oversight of banks like SVB and Signature Bank.
"Fed Chair Powell's actions directly contributed to these bank failures," wrote Warren, one of the most outspoken critics of Powell's policy decisions, which include scaling back post-financial crisis safeguards.
"For the Fed's inquiry to have credibility, Powell must recuse himself from this internal review," Warren added. "It's appropriate for Vice Chair for Supervision Barr to have the independence necessary to do his job."
Warren's demand came a day after the watchdog group Better Markets called for an independent inspector general probe of "the failures of Federal Reserve supervision," declaring that the central bank can't be trusted to "do a thorough and independent investigation of itself."
"The Fed must cease its self-investigation and immediately ask the chair of the Council of the IGs on Integrity and Efficiency (CIGIE), the Honorable Mark Lee Greenblatt, to appoint an IG independent of the Fed like the widely respected, nonpartisan DOJ IG Michael Horowitz to conduct a thorough investigation of the failures of Federal Reserve supervision," Better Markets president Dennis Kelleher said in a statement.
"If for any reason this is not an option," Kelleher added, "President Biden should appoint a respected, nonpartisan expert without any affiliation with the Fed or the financial industry to conduct the investigation and release a report to the American people, who are suffering the consequences of the Fed's failures."
Kelleher likened the Fed's oversight performance to "a bank guard asleep on the job with headphones on during a robbery," pointing to public warning signs of a looming disaster at SVB months before it collapsed.
"Whether the bailouts to prevent contagion and more damage from the collapse of Silicon Valley Bank (SVB) are successful or not, the Biden administration must hold those who caused SVB's failure or otherwise contributed to or enabled it or whose job was to prevent it accountable," said Kelleher. "First, SVB's executives must be sanctioned for their gross mismanagement if not reckless and illegal conduct."
"Second," he continued, "the Federal Reserve must be investigated and held accountable for its failure to properly regulate and supervise the bank. While the impact of the Fed's interest rate policies was a key driver of the failure (discussed in detail here and here), the bank undertook enormous unreasonable risks and the Fed failed to identify and require those risks be mitigated."
"Personal, meaningful accountability for everyone who failed in connection with the collapse of SVB must happen quickly and visibly," Kelleher said. "The American people expect and deserve no less."
Since the fall of SVB and Signature Bank, top progressive lawmakers including Warren, Sen. Bernie Sanders (I-Vt.), and Rep. Katie Porter (D-Calif.) have spotlighted and demanded the repeal of 2018 legislation that weakened regulatory scrutiny for banks with between $50 billion and $250 billion in assets—a category that includes the two failed institutions.
Lawmakers and experts contend that the measure, signed into law by former President Donald Trump, made the market-rattling collapses more likely.
During congressional testimony in 2018, Powell voiced support for the Republican-authored bill, which was also backed by a number of Democrats including Sens. Mark Warner (D-Va.) and Joe Manchin (D-W.Va.).
Siding with the bill's proponents, Powell brushed aside expert warnings that the regulatory rollback would heighten risks in the financial industry.
"I think it gives us the tools that we need to continue to protect financial stability," Powell said, specifically endorsing the part of the 2018 bill that loosed regulations for banks with less than $250 billion in assets.
"Personal, meaningful accountability for everyone who failed in connection with the collapse of SVB must happen quickly and visibly."
But Powell, who was first appointed by Trump and later reappointed by President Joe Biden in 2021, has done much more than endorse deregulatory legislation.
As Americans for Financial Reform (AFR) noted in a detailed summary of Powell's tenure, the Fed chief has directly helped turn off "some of the early warning systems regulators used to detect emerging risks to the financial system."
"Dodd-Frank introduced stress tests to assess how a bank would perform in the face of economic shocks and to work in tandem with rules improving resiliency to those shocks," AFR observed, citing a key post-financial crisis law. "The Powell Fed dumbed down the tests, and even revealed the criteria to banks beforehand, akin to giving students the exam questions in advance. This allows banks to camouflage risk-taking."
"The Volcker Rule was a pillar of Dodd-Frank that restricted the ability of banks to speculate with federally-insured money," AFR continued. "With Chair Powell's vote, the Fed diluted both parts of the Volcker Rule: the restrictions on proprietary trading and the restrictions on bank investments in particularly risky vehicles, like private equity and hedge funds. The Fed also relaxed rules that would curtail risky derivative activities by banks. After these rule changes, bank exposures to derivatives can increase via complex and opaque transactions with their affiliates."
Renita Marcellin, AFR's advocacy and legislative director, said Monday that "rolling back commonsense safeguards to ensure banks were liquid enough to pay their depositors was clearly the wrong decision."
"The collapse of these banks gives the Fed all the more reason to resist the self-interested arguments from banks and their allies in Congress," said Marcellin. "No one should give these arguments a sympathetic ear. Banks should not receive government backstopping when things go wrong and simultaneously lobby for weaker rules. Ordinary Americans are not afforded the same benefits when their finances are in the red."
This story has been updated to reflect a corrected quote from Better Markets.
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