Biden’s choice for banking regulator spurs climate debate


A little-known office within the Treasury Department has become the latest flashpoint in the debate over how best to protect America’s financial system from future risks, including climate change.

The battle for the office – known officially as the Office of the Comptroller of the Currency – began last month when President Biden appointed Saule Omarova, a well-known Wall Street critic, as head of the agency.

Omarova, Cornell University law professor since 2014, warned of the long-term financial risk of fossil fuel companies. She also called for a new federal authority to invest in projects that would support “socially inclusive and sustainable economic growth,” according to a paper she wrote last year.

Several elements of Omarova’s approach to financial regulation received a strong reaction from some quarters. Republican lawmakers and industry groups say Omarova championed “radical” political ideas that would fundamentally – and dangerously – reorganize the banking system. Many oppose his appointment.

The stakes are high. The Office of the Comptroller of the Currency oversees the US banking system and ensures that America’s largest banks operate in a “safe and sound manner.” This responsibility takes many forms. Among them: overseeing the largest lenders to ensure they are actively addressing emerging threats to the financial sector.

At this time, it is unclear whether the sharply divided Senate will consent to Omarova’s new role as head of the Office of the Comptroller of the Currency. But one expert said Omarova’s approach was well suited for the job.

“Willow Omarova is very sensitive to systemic risk in general, she knows very well how risks that permeate the entire financial system can lead to the whole financial system,” said Hilary Allen, professor of law at American University. specializing in financial regulation.

“So I expect her to be very sensitive to any threat to the financial system as a whole,” Allen added, “and I think climate change is one of them.

Financial monitoring

So what exactly is the Office of the Comptroller of the Currency? And what does this have to do with global warming?

Established in the mid-1800s, the agency is an independent office of the Treasury Department which, along with the Federal Reserve and Federal Deposit Insurance Corp., is responsible for overseeing the US banking industry.

“The OCC has the slice of the industry that includes national banks and federal savings associations whose charters – their license to operate – are granted by the federal government,” said Karen Solomon, a former senior official of the Office of the Comptroller of Currency and current Head of Counsel at Covington & Burling LLP, a law firm.

Fulfilling this role involves carrying out a range of regulatory activities, many of which take place in coordination with the Fed and FDIC, as well as with international standard setters.

They include banking supervision, regulating loan portfolios, and assisting in the administration of stress tests that assess the ability of companies to stay afloat in the face of unanticipated economic shocks. The agency’s role in identifying and developing policies to ensure that banks have sufficient capital to protect them from losses that might arise from emerging risks is also essential.

According to a growing coalition of lawyers and experts, many of these activities could and eventually should address climate-related risks, such as extreme weather events and the transition from fossil fuels.

As late as last week, advocates called on agencies, including the Office of the Comptroller of the Currency, to immediately “incorporate climate risk” into their regular reviews of businesses.

A critical first step, according to groups including the Natural Resources Defense Council and Public Citizen, would be to issue “oversight guidance detailing the specific issues that banks and your examiners will need to consider.”

“What supervision is essentially, examiners examine – in a confidential manner – a bank’s papers, its policies and procedures as well as their loan portfolios, to ensure that the bank is operating in a safe and sound manner. way, ”said Yevgeny Shrago, policy adviser to Public Citizen’s climate program.

If “you think climate change is a risk to banking, whether through physical risk or transition risk,” Shrago added, “then it’s important that the reviewers look to understand how the bank manages ”these problems.

In particular, the Office of the Comptroller of the Currency is already moving in this direction.

Acting Controller Michael Hsu said in a speech last month that the office under his leadership “is focused on developing effective climate risk management guidelines for large banks, in collaboration with our interagency peers.”

Opposition to Omarova

Solomon, the former head of the OCC, said that when it comes to climate-related financial regulation, there is no doubt about the direction agencies are taking given the growing attention to the issue. within the Office of the Comptroller of the Currency, in the United States and internationally. world.

“On the climate issue,” Solomon said, “it seems to me that if Acting Controller Hsu remains in place or Professor Omarova is confirmed, the OCC leadership will want to promote a climate change policy such as stated by the [Biden] administration.”

Even so, Salomon pointed out, “who is in which chair matters a lot.”

It’s hard to say for sure where Omarova stands on specific policy ideas to protect the banking sector from climate-related risks. “She has never been climate-focused in her work,” said Robert Hockett, a Cornell University law professor who has worked closely with Omarova for much of the past decade.

Omarova weighed in on the matter in some ways. Last year, for example, she wrote a paper arguing that Congress should establish a national investment authority to implement a long-term economic development strategy. The NIA is said to aim to “bridge the institutional gap” between the Treasury Department and the Federal Reserve to inject dollars into projects – climate related among them – which are underfunded.

And in 2020, when Wells Fargo & Co. and JPMorgan Chase & Co. suffered significant losses due in part to failed loans to struggling fossil fuel companies amid the early months of the COVID pandemic- 19, said Omarova in an interview with E&E News that the losses ‘crystallize’ the long-term risks posed by the oil, gas and pipeline industries (Climate wire, July 17, 2020).

Despite this, Omarova has not made her position clear on issues such as climate-related banking supervision, stress testing, etc.

That doesn’t seem to bother finance-focused environmentalists – who cite her time at Cornell, her former roles as Special Advisor to President George W. Bush’s Treasury Department, and her tenure at the Davis Polk law firm as evidence that she is highly qualified for the role. The Sierra Club and Evergreen Action were among those who welcomed Biden’s choice and urged the Senate to confirm Omarova as soon as possible.

“The Comptroller of the Currency has a critical role to play in preventing a climate-induced economic catastrophe from destroying our entire financial system,” Jamal Raad, executive director of Evergreen Action, said in a statement. “With the appointment of Willow Omarova, President Biden has chosen someone who is not afraid to take on Wall Street and has supported bold federal investments in clean energy for the climate.”

Republican lawmakers and industry groups, however, have raised concerns. The Chamber of Commerce, the American Bankers Association, the Independent Community Bankers of America, and Sen. Pat Toomey (R-Pa.) – who chairs the committee that will review Omarova’s appointment – have criticized various ideas that Omarova has put forward in previous academic articles. .

“Ms. Omarova called for ‘radically reshaping the basic architecture and dynamics of modern finance,’ including nationalizing retail banking and asking the Federal Reserve to allocate credit,” Toomey said in a statement. communicated. “She also pleaded for” to effectively end[ing] banking as we know it.

The House adopted a similar tone. The business group said in a statement that it “strongly opposes” Omarova’s appointment because her “academic writings are outside the mainstream of either of the major political parties and, s ‘they are implemented, would lead to an almost complete takeover of the banking sector by the government.

Neither the ABA nor the Bank Policy Institute have officially responded to questions about their position on Omarova, or on climate-related regulation more generally.

Omarova’s supporters rejected the argument. They say the articles Omarova’s critics refer to were academic thought experiments – not serious policy proposals that inform how Omarova would approach her work at the Office of the Comptroller of the Currency.

Moreover, these ideas are “really unrelated to the mission of the OCC,” said Allen, the professor at the American University. “So I think it’s kind of been used like a duck to cover up the fact that the real concern about her is that she’s going to be tough on the banks and make sure the financial system stays safe and sound.”

Allen said the approach would mark a significant departure from the office’s “patronage history” of “expanding banking” and “serving banks as customers.”

Hockett, who has co-authored numerous Omarova articles, agreed. He said he believed the industry was concerned about Omarova’s research that highlighted the risks cryptocurrency, fintech companies and other trends pose to economic stability.

According to the law firm Gibson Dunn, a recurring theme in Omarova’s work is that banking regulation is too narrowly focused on “micro” problems and solutions and that a new financial sector may be needed.

This way, Hockett said, Omarova’s critics “know that her relevant work is not really wrong. It’s just stuff they don’t like because it shows she’s in favor of regulating them.

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