FSOC: Climate Change an ‘Emerging Threat’ to Financial System

Climate change emerging threat

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The Financial Stability Oversight Council is taking climate change seriously, with Treasury Secretary Janet Yellen, the FSOC’s Chair, labeling it an “emerging risk” in comments Friday during a rare meeting of the Council.

As part of Friday’s meeting featuring open and executive sessions, the FSOC released and approved its federally mandated annual report. This year’s report describes activities of the Council over the past year, as the U.S. economy has continued to rebound from the disruptions caused by the COVID-19 pandemic.

Janet Yellen

“The Financial Stability Oversight Council’s annual report analyzes past episodes of financial turmoil to understand weak points in our financial system. It also reviews the actions taken by the Council to strengthen our financial system, with one eye on the past and one on the future,” Yellen said. “In the coming year, the Council will continue to monitor threats to financial stability and take concrete action where appropriate.”

One of those threats is climate-related financial risks. Yellen stressed during her comments Friday that she is very pleased with progress made by the Council in a short period of time on this topic. She noted the Council issued a Report on Climate-Related Financial Risk in October that made recommendations to promote the resilience of the financial system.

“These steps include expanding capacity, improving data and measurement, enhancing disclosure of climate-related risks, assessing the scale of potential vulnerabilities, and adjusting regulatory and supervisory tools,” Yellen said. “To help coordinate our efforts on these issues, the report called for the Council to establish a new staff committee, the Climate-related Financial Risk Committee, which she said the Council would create with a vote later in the meeting.

Specifically, the Council’s recommendations on the topic listed in the report state:

• Climate-related Financial Risk: The Council recognizes the critical importance of taking prompt action to improve the availability of data and measurement tools, enhance assessments of climate-related financial risks and vulnerabilities, and incorporate climate-related risks into risk management practices and supervisory expectations for regulated entities, where appropriate.

In addition, financial regulators, consistent with their mandates and authorities, should promote consistent, comparable, and decision-useful disclosures that allow investors and financial institutions to take climate-related financial risks into account in their investment and lending decisions. Through these actions, financial regulators can both promote financial-sector resilience and help the financial system support an orderly economy-wide transition to net-zero emissions.

• SEE ALSO: Republicans Slam ‘Woke’ ESG 401k Fiduciary Requirements

The Council provided more detailed recommendations to Council members in its Report on Climate-Related Financial Risk. 

Crypto and cybersecurity

“Of course, climate is not the only emerging risk,” Yellen continued. “As the annual report details, risks to U.S. financial stability are elevated compared to before the pandemic even as the financial vulnerabilities of banks and central counterparties are low. For instance, the report discusses potential shocks related to the elevated level of uncertainty characterizing the global growth outlook. The report also discusses vulnerabilities related to elevated asset prices, for example.”

In addition, Yellen noted the report highlights the critical importance of regulatory attention and coordination regarding stablecoins and other crypto assets, as the market for these assets continues to rapidly grow and evolve.

“Digital assets are a prominent example of financial innovation that present potential benefits and risks,” the FSOC annual report states. “Regulatory attention and coordination are critically important in light of the quickly evolving market for these assets. Because speculation appears to drive the majority of digital asset activity at the time, the price of digital assets may be highly volatile.”

Cybersecurity also remains a high priority, as does the LIBOR transition,” Yellen concluded. “I look forward to engaging with the Council in 2022 on these issues and others discussed in the report.”

The FSOC was created in the wake of the 2008 financial crisis to identify potential risks to the financial stability of the U.S. and to promote market discipline. It comprises the heads of the major U.S. financial regulators, including among several others Yellen, Federal Reserve Chair Jerome H. Powell and SEC Chair Gary Gensler.

Report goes into great detail

If you’ve got time for some light reading over the holidays—or perhaps more accurately heavy reading—check out the FSOC’s 199-page full report.

In addition to plenty more detail on climate-related financial risks, cybersecurity and cryptocurrencies, the report includes some interesting statistics on securities broker-dealers (page 93) and public and private defined benefit pension funding status (page 111).

For example:

• As of June 2021, there were approximately 3,500 securities broker-dealers registered with the SEC, a decline of 1.6% from year-end 2020, reflecting a steady decline since 2009.

• The U.S. broker-dealer sector remains relatively concentrated, with the 10 largest broker- dealers accounting for over 50% of industry assets.

• As of the second quarter of 2021, total pension fund entitlements funded by assets of U.S. private and public defined benefit pensions were $11 trillion, 16% higher than one year earlier. At the same time, defined benefit pension fund entitlements rose to nearly $17 trillion, a 2.7% increase compared to the second quarter of 2020.

• Milliman estimates that the 100 largest corporate defined benefit pension plans in the United States had an aggregate funded ratio of 97.2% at the end of September 2021.

• Milliman estimates that the aggregated funded percentage of multiemployer private defined benefit plans as of June 30, 2021 was 92%, up from 88% at year-end 2020. While the 2019 Pension Benefit Guaranty Corporation (PBGC) report estimated that PBGC’s Multiemployer Program would likely become insolvent in fiscal year 2026, new projections that reflect the enactment of the ARP Act and associated assistance now estimate insolvency to occur outside of the ten-year projection period, with a mean projection year of 2055.

• According to Milliman, the aggregate funded status of the 100 largest U.S. public defined benefit plans in June 2021 was 82.6%, up from 71% in June 2020.

SEE ALSO:

• ESG Investments Will Skyrocket by 2030: Report

• Yellen Bashes Bitcoin as Volatile, Inefficient, Illicit

• DOL Releases Cybersecurity Guidance for 401k Plans

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