New rule could make it harder for banks to sever ties with oil and coal companies

Rule, adopted Thursday by the Office of the Comptroller of the Currency, requires large banks to conduct a documented and individualized assessment of pending customers before refusing loan applications. This means that banks cannot simply decide to reject loan applications from fossil fuel companies, arms manufacturers or other industries simply because those companies do not align with the corporate values ​​of the lenders. .
The OCC faced a backlash when it proposed the rule in November. The agency received around 31,000 comments opposing the rule and far fewer in favor of it. In response, the OCC relaxed the regulations by removing a section that would have created new restrictions on banks by explicitly prohibiting them from refusing loans in certain cases.

Patricia McCoy, a professor at Boston College Law School, said the change “gives a lot more leeway” than when it was first proposed.

The rule, which has an impact on banks with more than $ 100 billion in assets, is the final regulation of the eight-month tenure of Acting Currency Comptroller Brian Brooks, who is stepping down on Thursday.

“Brian Brooks did something I never thought possible: he united the banking industry and reform advocates,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading, of the proposed rule. “They were united against a convoluted, ill-conceived and operationally problematic rule.”

The American Bankers Association, a powerful lobby group whose banks hold $ 17 trillion in deposits, slammed the OCC for deciding to “rush into this misguided rule-making” on Brooks’ last day in office and said the rule should not go into effect.

“In addition to bypassing the traditional rulemaking process and ignoring the thoughtful comments of thousands of stakeholders, we believe it is a mistake for the OCC to mandate companies that banks must serve, ”Hugh Carney, senior vice president of ABA prudential regulation, said in a statement.

Democratic Senator Sherrod Brown, the new chairman of the Senate Banking Committee, echoed the sentiment of the ABA.

“Forcing banks to make dangerous investments is a bad idea,” Brown told CNN Business in an interview last week. “At the end of the day, it doesn’t serve the financial system or the country.”

Brown, a Democrat from Ohio, added that Brooks, the OCC regulator, “will join a long line of Trump candidates seeking their own past and future business interests.”

Uncertain fate for the ruler

Brooks said in a statement Thursday that banks “have to show their work” when cutting access to loans.

“Banks should not terminate services to entire categories of customers without carrying out individual risk assessments,” he said, adding that “elected officials should determine what is legal and illegal in our country” .

The rule is expected to go into effect in April, but it’s unclear if that will happen.

It is possible that lawmakers could override it through the Congressional Review Act, which allows Congress to override regulations imposed by the executive. For example, President-elect Joe Biden has pledged to tackle the climate crisis, including joining the Paris climate agreement.

Boltansky said he was “confident” that the Biden administration would strive to overturn the rule.

Banks are starting to move away from fossil fuels

Environmental groups feared the adoption of the rule would bypass the growing momentum of big banks to distance themselves from oil and coal companies whose long-term fortunes are threatened by the climate crisis.

“This proposed rule is a latest outrageous attempt to hamper progress in tackling climate change as a systemic financial risk,” Steven Rothstein, chief executive of Ceres Accelerator for Sustainable Capital Markets, said in a statement last week. .

With the intensification of the climate crisis, some major banks have recently ruled out making certain loans in the hope of mitigating both their reputational and credit risks.

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In 2019, Goldman Sachs (SG) became the first major U.S. bank to commit not to take out loans for Arctic drilling. Many other big banks have followed suit.
And last fall, JPMorgan Chase (JPM) said it would be refuse the loan, the capital market and other business services that derive most of their income from coal mining. JPMorgan is also committed to pushing its customers to align their business practices with the Paris climate agreement.

Safety and solidity

The OCC is responsible for ensuring that lenders provide fair access to financial services and treat customers fairly. The aim is to ensure that banks don’t repeat redlining mistakes, the systematic refusal to lend to poor and minority communities.
But the OCC declared mission is also to ensure that national banks “operate in a safe and healthy manner”.

McCoy, a former regulator with the Consumer Financial Protection Bureau, points out that climate change risk “poses long-term security and soundness issues for national banks that lend to the fossil fuel industry.”

Falling sales, job losses and bankruptcies: pain spreads through coal country
This is because the worsening climate crisis is clouding the outlook for fossil fuel companies. Coal companies went bankrupt. Investors have greatly depreciated the value of oil and gas companies and made it more difficult for them to raise capital. A climate crackdown from Washington lawmakers would pose more problems for the fossil fuel industry.

“Banks have started to take steps to protect themselves against this [climate] risk, “Ceres said in the statement.” The OCC should help them along this path, not throw obstacles at them. ”

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