Banks push back on OCC’s bid to ban lending bias

The banking industry is asking for more time to comment on a regulatory proposal that aims to prohibit banks from denying services to oil and gas companies and other firms in politically sensitive industries.

Caught off guard when the Office of the Comptroller of the Currency issued the proposal last week, industry trade groups are asking the OCC to extend the 45-day comment by another 30 days. The comment deadline is Jan. 4.

“The Associations and their member institutions are concerned that the existing comment deadline does not provide sufficient time to perform the level of analysis that this proposal warrants,” the Bank Policy Institute, American Bankers Association, Consumer Bankers Association and Financial Services Forum, wrote in a joint letter to the OCC.

But the OCC appears to be standing firm. It argues that the proposal simply formalizes guidance “issued and reinforced” by the agency since 2014.

“We are surprised that the banks are surprised,” OCC spokesman Bryan Hubbard said in an email. “The failure to operationalize such long-standing guidance only underscores why the rule is needed. We look forward to reviewing all of the stakeholders’ comments.”

Many banks in recent years have curtailed their lending for oil and gas exploration, arguing that fossil fuel projects not only contribute to a warming world but increasingly pose business and reputational risks for lenders.

But the OCC says such pledges amount to discrimination and wants to prohibit from denying services from lawful businesses that meet quantitative, objective standards for receiving services.

The OCC’s “fair access” standard would require that banks with more than $100 billion of assets disregard any social or political considerations when deciding which industries or companies they will do business with. In the proposal issued Nov. 20, the agency called out several politically sensitive industries in which banks have curtailed activities, including not just the oil and gas sector, but also family planning clinics and gun dealers and manufacturers.

Some environmentally conscious investors criticized the proposed rule as an overtly political attempt to curry favor with Republican legislators and further argued that banks have business justifications for limiting their exposure to oil and gas. One recent analysis by Ceres, a nonprofit focused on corporate sustainability, suggested that banks are still greatly underestimating their financial exposure to climate risk.

“This is an 11th hour move by an outgoing administration that we think will limit banks from meeting their fiduciary responsibility,” said Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets. “Some banks have decided that they don’t want to invest in a risky sector of our economy, like coal or Arctic drilling.”

While large U.S. banks still actively finance fossil fuel exploration and related activities, many, under pressure from shareholders, have recently pledged to curtail financing of carbon-intensive activities and ramp up investments in renewable energy.

Goldman Sachs, for example, said last year that it would stop financing coal mining and Arctic oil exploration projects. More recently, Morgan Stanley and TD Bank Group committed to achieve net-zero carbon emissions from their financing activities by 2050. Citigroup has committed $250 billion in new financing for low-carbon projects, and JPMorgan Chase has promised $200 billion for renewable energy projects, both by 2025.
Banks have generally cited a mix of business and reputational reasons for undertaking these initiatives.

“Climate change is a critical environmental and business challenge and will require significant effort over the long term to help economies transition successfully to the low-carbon future,” Bharat Masrani, president and CEO, said when TD Bank Group announced its latest commitment earlier this month.

In its proposal, the OCC cited a letter from Alaska lawmakers who were concerned about several big banks’ announcements to curtail their lending to new oil and gas projects in the Arctic and who suspected the banks’ motives were political. The agency said that when it contacted several banks to investigate, it found that some of the nation’s largest banks had stopped doing business altogether with one or more major energy industry categories.

The OCC contends that its proposed rule is broader than credit risk and is intended to ensure banks provide services, including taking deposits and processing payments, to all legal businesses. Moreover, the agency said the rule does not preclude banks from considering risks associated with climate events if a bank can show its analysis of that financial risk.

“Our rule specifically acknowledges that climate change is a risk, and where that risk affects a bank’s collateral or credit exposure the bank should quantify and manage that risk accordingly,” Acting Comptroller of the Currency Brian Brooks said in an email. “But banks are not equipped to balance the generalized risk of climate change in the world against other risks such as dependence on foreign oil, rolling blackouts due to energy shortages, and the like.”

It’s conceivable that some banks could use the proposed rule as a justification for abandoning certain pledges concerning financing of fossil fuels, said Lauren Compere, the managing director of the Boston Common Asset Management.

But Compere and others said that banks aren’t strictly responding to public and shareholder pressure when making these pledges. They’re also responding to what the markets, data and even other financial regulators are telling them.

Other U.S. financial regulators, including Federal Reserve Chairman Jerome Powell, have affirmed climate change as a systemic financial risk and said the industry and its regulators have a role to play in mitigating that risk.

Several regional Federal Reserve banks, including New York and San Francisco, have convened discussions and called on the industry to collaborate on some of the challenges brought on by global warming.

Additionally, clean sources of energy are becoming cheaper and more popular, thanks in large part to improvements in technology. Given the growing market for renewable energy, it’s entirely reasonable for banks to account for the risk of stranded assets when considering financing for a new natural gas pipeline, for example.

Compere said, “If it’s an infrastructure project, is that even going to be needed in say, 10 or 15 years?”

Some doubted the proposed rule would stand up to a challenge — if it is ultimately finalized at all. Karen Petrou, a managing partner at Federal Financial Analytics, challenged the agency’s framing of fair access, pointing out that “fair” has historically meant non-discrimination based on membership in a protected class.

“This is a novel view of a much broader and more expansive concept of discrimination based on a category of lawful business,” she said.

With comments due on Jan. 4, the OCC would have very little time to sift through comments and make a decision before President-Elect Joe Biden, a Democrat, is inaugurated. Even if it is finalized, the incoming administration may be likely to suspend its enforcement or reverse it.

“Just because something is in the rulebook doesn’t mean it’s on Mount Rushmore,” Petrou said.

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