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Blog Post | March 16, 2021

FSOC 101: How Each Member Of The Financial Stability Oversight Council Can Fight Climate Change

ClimateFinancial RegulationIndependent Agencies
FSOC 101: How Each Member Of The Financial Stability Oversight Council Can Fight Climate Change

Title 1 of the Dodd-Frank Act Title established the Financial Stability Oversight Council (FSOC) just over a decade ago. Prior to its arrival, there was no cross-agency government body tasked with protecting the financial system from systemic risks. FSOC was created to avoid repeating the mistakes of the 2008 financial crisis and to be a safeguard against financial practices with the potential to wreak global havoc.

Understanding FSOC — its members, its powers, and its norms — is crucial in the urgent fight against climate devastation. FSOC is an overarching government body made up of member agencies with voting power to make significant decisions. It is tasked with identifying “systemic risks” which make the global financial system vulnerable to destabilizing forces, and recommending specific action to its member agencies. While it cannot force agencies to act, it will be a crucial forum in which to coordinate individual agencies’ approaches and instigate a race to the top on climate policy. Climate activists generally hope FSOC will lead the charge to shift capital (money in the form of investments, stocks, insurance, etc) away from carbon-polluting industries and limit the power of the corporations wreaking climate havoc. 

FSOC also has the power to designate large bank and non-bank institutions “systemically important,” subjecting them to higher regulatory standards. In tandem with the Federal Reserve, this designation could pave the way for climate stress tests, an increase in capital requirements to account for climate damage, and even mandated divestment from climate-destroying assets. This is relevant in the case of, say, BlackRock, the world’s largest asset manager and biggest global investor in fossil fuels.

Understanding what each member of FSOC can bring to the climate action table allows environmental activists to pinpoint our energy on the correct entity, pressure our federal government to use its existing powers, and appropriately hold accountable the financial regulators for the work they must be doing.

Some of this material was taken from our previous work outlining Fossil Fuel’s “Industry Agenda”.

Voting members of FSOC

  • the Secretary of the Treasury, who serves as the Chairperson of the Council;
  • the Chairman of the Board of Governors of the Federal Reserve System;
    • To name just a few examples of its tremendous powers, the Fed could alter interest rates in risky investments (i.e. beachfront developments, fossil fuel projects), consider climate when choosing to buy corporate debt (ideally choosing not to bail out fossil fuel companies like they did in 2020), appoint reserve bank presidents with strong climate records, require climate stress tests for regional banks, and ultimately require divestiture from climate-damaging assets.
  • the Comptroller of the Currency (OCC);
    • As the chief federal bank regulator, the OCC can set rules applicable to Wall Street banks including establishing lending standards for individual industries. Should the OCC update its Comptroller’s Handbook to tighten lending standards and scrutiny for banks subsidizing the fossil fuel industry, it will dramatically shift Big Oil’s access to credit overnight.
    • See our previous work on this
  • the Director of the Bureau of Consumer Financial Protection (CFPB);
    • The CFPB is responsible for creating, supervising, and enforcing Federal consumer financial protection laws and regulating to prevent unfair, deceptive, or abusive practices against consumers. Its central task will be to ensure that climate action does not come at the expense of consumers, and it has an opportunity to prove that fossil fuel investment and climate destruction harms consumers. It could scrutinize marketing of products like mortgages and retirement investment accounts for misleading or deceptive “greenwashing” and work with the SEC and the Department of Labor to ensure retirement and pension money is actually allocated to environmentally friendly investments when marketed as such. It can also ensure that any financial assistance, such as PACE loans for retrofitting homes to be more energy efficient, are not hurting consumers. 
  • the Chairman of the Securities and Exchange Commission (SEC);
    • The SEC is generally seen as the leader in creating climate risk disclosure standards for stock traders, which Acting Chair Allison Herren Lee has already begun. It could mandate that publicly-traded companies fully disclose their climate change-related risks to stock traders and investors. It could also work with the Department of Labor to require mutual fund and investment advisors to consider environmental, social, and governance (ESG) factors, and require other financial actors to incorporate ESG factors into their ratings and actions.
    • See our previous work on this
  • the Chairperson of the Federal Deposit Insurance Corporation (FDIC);
    • The FDIC insures bank depositors against Great Depression-style bank runs and has oversight power over bank mergers. Banks pay premiums on FDIC insurance that are tailored to their risk portfolios, meaning that if climate risk is factored into these calculations, banks with dirtier and more dangerous assets could have to pay more into the federal government’s coffers. That’s a strong incentive for banks to clean up their portfolios. Further, considering that bank conglomerates are responsible for providing many funds to the fossil fuel industry, the FDIC could consider banks’ fossil fuel lending records when reviewing and approving mergers.
  • the Chairperson of the Commodity Futures Trading Commission (CFTC);
    • The CFTC could incorporate climate risk into disclosure requirements for futures and derivatives markets, increase capital requirements for market actors to properly account for climate risk, and require supervisory “stress tests” for derivatives clearinghouses to take climate impacts into account. It’s also possible the CFTC’s jurisdiction could include private companies more so than any other agency, which would be hugely impactful.
    • See our previous work on this
  • the Director of the Federal Housing Finance Agency (FHFA);
    • The increasing rate and intensity of natural disasters that climate change brings poses a severe risk to the United States’ housing stock and, thus, to its mortgage market. The FHFA oversees Fannie Mae and Freddie Mac, government-sponsored entities that are tasked with expanding home ownership rates by providing a guaranteed market for mortgages. The regulator may be able to account for climate risks when choosing the mortgages that it is willing to subsidize but this is not settled. The FHFA does have a statutory mandate to expand home ownership, so any steps it takes to climate change would likely have to be designed to simultaneously advance both goals. 
    • Climate and Natural Disaster Risk RFI 
    • FHFA asks for input on GSEs’ exposure to climate change 
  • the Chairman of the National Credit Union Administration (NCUA); 
    • NCUA serves a role for America’s credit unions similar to what the OCC and FDIC do for banks: insure depositors for up to $250,000 and conduct regular oversight, regulation, and enforcement to reduce instability. The NCUA does not charge risk-based premiums on depositor insurance like the FDIC, but if the bank regulators were to designate climate change a systemic financial risk and enact climate-oriented regulations, by law the NCUA would have to enact similar rules for credit unions. NCUA’s risk-based capital rules kick in for a significantly smaller share of its ensured entities than the banking regulators, but credit unions also have vastly smaller pools of capital in the first place, and cannot issue stock and thus gamble with “other people’s money.” Still, it is worth noting that under existing rules, many NCUA climate finance regulations may not touch many credit unions.
  • an independent member with insurance expertise who is appointed by the President and confirmed by the Senate for a six-year term.
    • This official is a voting member of FSOC but does not control a body with independent regulatory power, unlike the Council’s other members. The independent member exerts influence through their role on the Council. Trump appointee Thomas Workman, a life insurance industry executive, currently holds this role. He is serving a six-year term that will expire in 2024. The independent member does not benefit from for-cause removal protections so can be removed at any time. Biden should replace Workman with an insurance expert who recognizes risks of climate change to the planet and the insurance sector. 

Nonvoting members of FSOC, who serve in an advisory capacity and each serve two-year terms

  • the Director of the Office of Financial Research;
    • Housed in the Treasury Department, this office could produce reports measuring climate risk, quantifying the benefits of moving away from fossil fuels, and offer analysis to be used by other financial regulators in their climate work. Climate finance hawks differ on where and how climate financial regulatory standards should originate, but almost no one denies that OFR will have some important role to play.
  • the Director of the Federal Insurance Office;
    • Housed in the Treasury Department, this office is tasked with monitoring the insurance industry, with particular attention to inequities in coverage and access, coordinating federal policy with regards to international insurance measures, working with state insurance regulators, and recommending insurance companies for designation as SIFIs. Through these various responsibilities, this office can investigate the risk that climate change poses to the industry, clarify the role that the industry plays in exacerbating climate change, and generate pressure for responsive solutions at the state, federal, and international levels.  
  • a state insurance commissioner designated by the state insurance commissioners;
    • This commissioner is intended to represent the interests of the country’s state insurance regulators on the council. They would naturally work most closely with the FDIC and the other independent member with insurance expertise, and could generally have input into adding climate risk into insurance calculations and pressuring insurance regulators to consider climate. 
  • a state banking supervisor designated by the state banking supervisors; and
    • This representative is usually a state Banking Commissioner with experience in chartering, regulation, supervision, and examination of state-chartered banks. Thus, they would support the work of the Comptroller of the Currency and the Chairperson of the FDIC in banking-related matters and could impact the inclusion of climate risk into stress tests, capital requirements, shareholder dividend requirements, and otherwise regulating banks. 
  • a state securities commissioner (or officer performing like functions) designated by the state securities commissioners.
    • This person would have expertise in securities (stock) trading and thus would work most closely with the Chairperson of the SEC. They would usually represent the interests of investors and therefore could be key in making the connection for investors between climate change and their financial interests.

Photo: “Financing Climate Change” by Visible Hand is licensed under CC BY 2.0

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