October 01, 2015

Mark Carney should not warn other about climate change risks, if he neglects to do what is in his hands to do about it

Sir, you write that BoE is rightly worried about the dangers posed by climate change “Carney’s warning on carbon’s financial risks". October 1.

Of course the consequences of climate change, and of the regulations designed to stymie it, and of the gaming of those regulations, represent a huge potential of unexpected losses. But, if Mark Carney were really concerned about climate change then, as the current Chair of the Financial Stability Board, instead of casting himself as Cassandra in order to warn others, he would see to that bank regulators duly considered that risk.

For instance he could try to convince his colleagues that banks, in relative terms, should be allowed to hold less capital when helping to finance sustainability, so that they earn higher risk adjusted returns on equity when they finance sustainability, and so that banks finance sustainability a lot.

But instead Carney and his colleagues have set their risk based capital requirements for banks solely based on ex ante perceived credit risks, basically the only expected risks that banks already clear for. If that is not dumb what is?

Sir, what we now have is unbelievable. Banks, those who concentrate the most knowledge about evaluating credit risks, and should therefore be the first line of credit-risk takers for the society, by lending to for instance SMEs and entrepreneurs, are being allowed to earn much higher risk adjusted returns on their equity when minimizing credit risks… which leaves the risk-taking soldiering to all us other… widows and orphans included.

And, talking about moral responsibilities, should not Mark Carney have warned all aspiring “risky” entrepreneurs that, because they were usually perceived as risky from a credit point of view, they should forget their plans and dreams as they could no longer count on a fair access to bank credit?

And, talking about moral responsibilities, should not Mark Carney warn all our young that, henceforth, banks would not be financing sufficiently their future, as that requires a lot of risk-taking, but would mostly be dedicated to refinancing a safer past.

And, talking about moral responsibilities, how can bank regulators ignore the fact that it is not what is perceived as risky that poses the major dangers for our banking system, it is always what can be erroneously perceived as absolutely safe.

Sir, as I see it the Basel Committee regulators have and are producing losses of almost a climate change scale… and FT refuses to warn about it.