Tuesday, November 24, 2020

OCC fights de-banking. Fed moves to climate.

Part 1: The OCC

The OCC issued a refreshing rule proposal, covered in a nice WSJ oped by Brian Brooks and Charles Calomiris. It is as interesting as a compendium of what's going on as it is for a rule to put an end to it, especially since enthusiasm for the rule is likely to change about Jan 20.  

...practices that amount to redlining whole parts of the economy that banks find politically unpalatable, including independent ATM operators, gun manufacturers, coal producers, private correctional facilities, and energy companies. Also under threat of interest-group pressure campaigns are gasoline-powered car manufacturing, large farms and ranches. Many of the targeted industries are those unpopular on the political left. But we’ve also heard allegations of banks being pressured to cut off programs and business disfavored on the right, such as Planned Parenthood.

Their summary of the rule

Banks may not exclude entire parts of the economy for reasons unrelated to objective, quantifiable risks specific to an individual customer. Banks ... cannot deny a service it provides except on the basis of an objective analysis of the riskiness of the client. Banks are not free to refuse credit simply because they don’t agree with a customer’s business.

I think the latter characterization is a bit wrong. Banks are not all doing this because they don't agree with a customer's business. Banks are doing this because they are afraid of pressure from both right and left. They are afraid of ESG pressure from their investors.  

I suspect banks would enjoy a clear rule, in which case they can say to protesters, shareholders, media and others, we'd love to de-fund your latest cause, but the mean old OCC won't let us do it. 

The proposed rule has a long preamble giving the legal and regulatory history. 

Consistent with the Dodd–Frank Act’s mandate of fair access to financial services and since at least 2014, the OCC has repeatedly stated that while banks are not obligated to offer any particular financial service to their customers, they must make the services they do offer available to all customers except to the extent that risk factors particular to an individual customer dictate otherwise. 

It is clearer about banks are often pressured, rather than choosing to discriminate on their own -- though the later is documented as well. (See the rule for footnotes documenting each case) 

banks are often reacting to pressure from advocates from across the political spectrum whose policy objectives are served when banks deny certain categories of customers access to financial services.

The pressure on banks has come from both the for-profit and nonprofit sectors of the economy and targeted a wide and varied range of individuals, companies, organizations, and industries. For example, there have been calls for boycotts of banks that support certain health care and social service providers, including family planning organizations, and some banks have reportedly denied financial services to customers in these industries. Some banks have reportedly ceased to provide financial services to owners of privately owned correctional facilities that operate under contracts with the Federal government and various state governments.

Makers of shotguns and hunting rifles have reportedly been debanked in recent years. Independent, nonbank automated teller machine operators that provide access to cash settlement and other operational accounts, particularly in low-income communities and thinly-populated rural areas, have been affected. Globally, there have been calls to de-bank large farming operations and other agricultural business...

They don't mention pot farmers, presumably because they are still illegal under federal law.  

In June 2020, the Alaska Congressional delegation sent a letter to the OCC discussing decisions by several of the nation’s largest banks to stop lending to new oil and gas projects in the Arctic....The letter also stated that, although the authors believed that the banks’ rationale was political in nature, the banks had ostensibly relied on claims of reputation risk to justify their decisions.

In response to this letter, the OCC requested information from several large banks to better understand their decisionmaking. The responses received indicate that, over the course of 2019 and 2020, these banks had decided to cease providing financial services to one or more major energy industry categories, including coal mining, coal-fired electricity generation, and/or oil exploration in the Arctic region. The terminated services were not limited to lending, where risk factors might justify not serving a particular client (e.g., when a bank lacked the expertise to evaluate the collateral value of mineral rights in a particular region or because of a bank’s concern about commodity price volatility). Instead, certain banks indicated that they were also terminating advisory and other services that are unconnected to credit or operational risk. In several instances, the banks indicated that they intend only to make exceptions when benchmarks unrelated to financial risk are met, such as whether the country in which a project is located has committed to international climate agreements and whether the project controls carbon emissions sufficiently.

My emphasis. 

The actual rule is mercifully short and clear. After definitions (including  that "person" includes "Any partnership, corporation, or other business or legal entity."

(b) To provide fair access to financial services, a covered bank shall:

(1) Make each financial service it offers available to all persons in the geographic market served by the covered bank on proportionally equal terms;

(2) Not deny any person a financial service the bank offers except to the extent justifiedby such person’s quantified and documented failure to meet quantitative, impartial risk-based standards established in advance by the covered bank;

(3) Not deny any person a financial service the bank offers when the effect of the denial is to prevent, limit, or otherwise disadvantage the person:

(i) From entering or competing in a market or business segment; or

(ii) In such a way that benefits another person or business activity in which the covered bank has a financial interest; and

(4) Not deny, in coordination with others, any person a financial service the bank offers.

Of course, the chance of this rule surviving and being implemented as it stands in the new administration is small. But not all de-banking comes from the left, and perhaps there is hope that keeping funding open to, say, planned parenthood, and seeing the danger that banks can also be pressured by right-wing groups  will encourage them to put climate-based squeezing of fossil fuel companies where it belongs in EPA or elsewhere rather than try to pressure banks to do it. 


Part 2: The Fed

The IMF, BIS, ECB, BoE, are embarking on just such de-funding of fossil fuels, this time mandated by regulators. (Previous posts here and here.) I had praised the Fed and its chair Gerome Powell in particular for eschewing this mounting pressure. 

It seems the Fed's resolve is weakening. As reported by Andrew Stuttaford

The Federal Reserve on Monday for the first time formally highlighted climate change as a potential threat to the stability of the financial system and said it is working to better understand that danger.

In its semiannual report on financial stability, the Fed said it would be helpful for financial firms to provide more information about how their investments could be affected by frequent and severe weather and could improve the pricing of climate risks, “thereby reducing the probability of sudden changes in asset prices.” 

which is, on account of weather, negligible, and the unknown probabilities of which, due to climate change, are precisely zero. 

It also said it expects banks “to have systems in place that appropriately identify, measure, control, and monitor all of their material risks, which for many banks are likely to extend to climate risks.”...

It always starts with "disclosure." Then the activists and ESG funds know where to go.   

Fed Chair Jerome Powell said last week that the “science and art” of incorporating climate change into financial regulation is new but that the Fed is “very actively in the early stages” of getting up to speed and working with officials around the world....

See previous posts for what those officials are up to.  

If you had asked me then what my test would have been to determine whether the Fed had finally succumbed to the mission creep that he described so well, it would have been the news that it had finally applied to join the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).

"The Federal Reserve expects in coming months to join the Network for Greening the Financial System, a group of 75 central banks set up to combat climate change by better understanding the risks it poses to economies.

“We have requested membership. I expect that it will be granted,” Fed Vice Chair for Supervision Randal Quarles told a hearing before the Senate Banking Committee Tuesday. He said the Fed could probably join before the NGFS’s annual meeting in April."

Especially if you see the climate as a present crisis, and you wish to have a coherent, sustainable, cost-benefit tested policy that actually reduces carbon, I hope you recognize how nutty and absolutely dishonest it is to address climate by having bank regulators force banks to make up  imaginary "climate risks" to the financial system to justify near-term de-funding fossil fuel companies. A policy built on a lie will either require us to descend to Soviet style lie-repetition, or will blow up just as we need a coherent carbon policy. 


Part 3: Regulatory competition. 

If the OCC rule goes through, the OCC will forbid what the Fed requires. This will be fun. The OCC will lose, but at least it shines a bright light on what's going on. 

It is common to bemoan America's fractured and overlapping regulatory system, with an alphabet soup of agencies all trying to do the same thing. Centralization and uniformity always sound great. Here is a case where regulatory competition looks like a very good thing. At a minimum one regulator can shine a light on what the other is doing, and at best competing regulators can limit regulatory damage. 

Update: I am informed that the OCC rule may in fact be final before Jan 20, which would make it much harder to overturn. It doesn't have to be enforced, of course. 


  1. The product that banks produce is financial intermediation. The OCC rule seems to prevent banks from selling a product tailored to what some customers might want. For example, consumers might not want to buy financial intermediation between themselves and the coal industry (or planned parenthood). And, the justification for this rule is that banks like it because they don't like pressure from their customers - is this not the definition of enforcing a cartel?

    1. Would be an interesting point if the priorities of a subset of 'some customers' did not lead to the bank making decisions for all customers.

    2. Requiring banks to allot loans only on the basis of risk considerations is not the same as requiring you personally being required to do as much with your portfolio. I'd tend to think that what you describe here would be allowed under this rule change. The goal is to stop banks from indulging activists, not to stop you from making your own decisions.

    3. I guess the problem is, some customers might have very weird ideas about where they want their money to be invested or not invested. If a bank therefore would want to exclude individual races or genders or so from their intermediation services, we might rightly not want to tolerate that, even if it might seem the due right of an individual to want to invest, say, in a specific (weird) subtype of projects. The question is whether there simply need to be some to be determined subtle limits, or whether the blanket OCC rule should be imposed.
      I love the post and the question, and despite being environmentalist, I also find it crucial that climate etc. action is done at the right place and not in arbitrary places. But I'm spontaneously also not sure this is as trivial a question as the author seems to think indeed.

  2. Interesting post.

    A libertarian might say a privately-owned bank has the right to not lend as they see fit, and if they see fit not to lend to Business X due to customer pressure, then so be it.

    (BTW, I think pro-Trump Goya Foods faced down a consumer boycott, as Trumpsters decided they like Goya beans. So if a bank cuts off a gun-maker, another bank would probably step in).

    There is the likelihood that if some profitable businesses are cut off from the commercial banking system they will merely migrate to non-bank banks, fintech financial services, and/or raise equity, convertible debt etc.

    As a practical matter, what about international banking?

    All in all, I agree that a lot of additional red-tape and virtue-signaling is on tap. The Fed has no business getting involved in a warming climate or any political issue I can think of.

    1. A libertarian would require competition and free entry into banking which we do not have. If people want ESG funds, there are plenty of them that directly steer investments to whatever socially conscious ends people want. The real point of the OCC rule is to try to stop the Fed from requiring de-banking of unpopular industries by inventing fictitious risks.

    2. John, you suggest that the real point of the OCC rule is to stop the Fed from requiring de-banking. But if so, isn't the proper place to apply this rule at the government level? Require that the Fed (and FDIC) be impartial. But leave the banks free to choose which companies they want to lend to.

    3. This comment has been removed by the author.

  3. It will be interesting to watch the Federal Reserve attempt to square that circle. "Price stability" and "full employment" are the two pillars of the Fed's mandate from Congress. Will the Fed act in a way that effectively counters or neuters the OCC rules, and justify its actions on the basis of protecting "price stability" and/or preserving "full employment"?

    Former Bank of England governor Mark Carney would probably encourage the Federal Reserve governors to do just that in the interest of defunding whole industries that Mr. Carney apparently disfavours. E.g., the coal producing and transportation industries, the thermal power-plant based electrical generation and distribution industries, primary steel-making industries, the forest products producing industry that does not meet Mr. Carney's standards of "sustainable practices", etc.

    There will undoubtedly be pressure brought to bear on the Fed to sanction banking practices that provide financial services to disfavored industries that the new administration considers pose harm to the atmosphere, the oceans, and humanity in general. The pressure will be subtle rather than overt, indirect rather than direct, unobvious rather than blatant, but which will deliver the message load and clear to those attuned to receiving messages on that channel.

    Interesting times. Not only do we see a polarized civil society, but we are now to be witnesses to the polarization of ostensibly neutral federal agencies within the federal government, including the Federal Reserve.

    Four years of disciplined mayhem and disciplined dystopian central planning and levelizing, replacing four years of chaotic and hueristic deconstruction of the regulatory state--which will provide the greater improvement in social welfare over the course of four years? We are about to experience another episode of the periodic upheavals that a repubilican form of government is uniquely prone to. Interesting times; perhaps the end of time. A natural experiment that should attract the social scientist's rapt attention, and the economist's natural cynicism.

  4. Dear Professor Cochrane,

    I'm not going to get into an argument about the banks or the regulations. This is a simpler question. Is there a possible identifiable climate risk for which you would find it reasonable for the banks to be regulated? If banks were approached to finance a fire-laden festival ground, of several acres, to celebrate something like Chaharshanbe Suri (as in https://irandoostan.com/iranian-fire-jumping-festival-chaharshanbe-soori/) in an area that was at extremely high risk for wildfires, and one where they would cause billions of dollars of property destruction and loss of lives in the very likely event the fires got out of control, there would be a role for regulation. This is just a question as to whether there are any climate risks you could imagine that would approach this sort of standard.

    Julian Silk

    1. You're confusing climate and weather, and expected value with variance. A climate risk is uncertainty about the climate, not the weather, over the next 5 years or so that we can think about bank portfolios, in a way that might cause a bank to fail, and that is not captured by current risk measurement and management techniques. That's just nonsense. The speed of climate change is known for 5 years, and weather just is not a factor to broadly diversified bank portfolios, and banks know all about it. Yes, they have thought to update their hurricane risk measures for real estate investments, thank you.

      The real answer is that financial regulation should not try to measure and stop all risks - -the nobody can lose any money approach. Financial regulation should eliminate run-prone short-term financing and let banks, and now non-bank financial institutions under the Fed's ever widening gaze, do what they want. And let the EPA and Kerry handle climate.


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.