Weekly roundup: Fed confirmations, collateral assets and bitcoin

January 21, 2022|Written by Graham Caswell|Central Bank of Uganda, Banque de France, De Nederlandsche Bank, European Central Bank

The US Senate banking committee chair on Fed confirmations, climate risks to asset backed securities, the huge carbon footprint of bitcoin transactions and other news from this week in green central banking.

Committee chair confident on Fed confirmations

US Senate banking committee chair Sherrod Brown said he is “virtually certain” that Fed vice chair nominee Lael Brainard will be confirmed, following her recent appearance before the committee.

According to Bloomberg, Brown assumes that all five of Biden’s nominations will get backing on the Senate floor, including Biden’s nominee for vice chair for supervision, Sarah Bloom Raskin. Both Brainard and Raskin have been outspoken on climate issues, with Raskin advocating strongly for the adoption of a precautionary approach to climate risk, due to the radical uncertainty and vast scale of the climate threat to price and financial stability.

Studies show that Americans are increasingly alarmed about climate change and business leaders rank climate inaction as the most serious risk they face. As a result, climate change has become an issue in the confirmation process, although the Fed is far behind its international peers in responding to the climate crisis. However, opposition to climate action remains among Republicans, many of whom deny the science behind the threat despite a dramatic increase in the frequency and intensity of extreme weather events.

Brown is planning a joint hearing with Raskin and Biden’s two other Fed nominees, Lisa Cook and Philip Jefferson, during the first week of February. While Raskin is likely to face opposition to her climate views during the hearings, she has received support from financial industry analysts, former Fed employees (paywall) and academics as a result of her pragmatism and extensive experience.

The nominations of Raskin, Cook and Jefferson have also been welcomed by the American Bankers Association, the industry body representing the banks that Raskin would be charged with supervising.

Raskin’s qualifications for the supervisory position are formidable. A former member of the governing board at the Fed, she also served as Maryland commissioner of financial regulation and managing director of the Promontory Financial Group. She is currently a Rubenstein fellow at Duke University where she leads research on regulation and resilience in financial markets.

The climate risk exposure of asset backed securities

The Banque de France has released a working paper analysing the climate risk exposure of asset backed securities (ABS), commonly pledged as collateral in refinancing operations by the European Central Bank .

Using existing loan-level data, the study examines ways to measure the climate risk of ABS based on the characteristics of the underlying loans. Despite substantial limitations in the available data, the researchers managed to identify several relevant indicators related to the carbon impact of ABS, allowing the computation of ABS climate related risk proxies.

However, these indicators are useful for reference only, and limitations in the data available did not allow a measure of concrete impact. The paper concludes with a call for “an improved and harmonised framework for the provision of non-financial information” in order to accurately measure the financial sector’s exposure to climate change.

Bitcoin’s carbon footprint increases with price

A study from De Nederlandsche Bank has found that the carbon footprint of Bitcoin transactions increases with its price, as higher values attract more miners who then consume more electricity.

Utilising a new methodology to measure the cryptocurrency’s carbon footprint, the analysis found that in 2020 the climate impact of bitcoin was approximately 402kg of CO2 per transaction. This is equivalent to two thirds of the monthly emissions from an average Dutch household (611 kg of CO2 per month). The study shows that while the number of bitcoin transactions fell by 6%, the total carbon footprint of the network increased by about 25% in 2020. While more sustainable alternatives to the bitcoin algorithm are available, it remains difficult to compare the total climate impact of cryptocurrencys with conventional means of payment

Central Bank of Uganda to issue green finance guidelines

The Central Bank of Uganda will shortly issue green finance guidelines for the funding of small and medium enterprises (SMEs), according to its director commercial banking.

Hannington Wasswa, director of commercial banking, told a recent forum on green finance that SMEs play a crucial role in averting climate change and the related negative effects on the economy,, but commercial banks have been unable to extend credit facilities to green enterprises.

“The central bank is coming up with a policy on green finance and with regulations that we shall use to guide the financial sector on how to implement green financing,” Wasswa said, adding that the BoU plans to integrate climate-related risks into assessments of Uganda’s micro and macroeconomic conditions.

Giving money makers a climate mandate

Even central bankers interested only in price stability would be convinced of the need to act on climate change if they allowed the scale of the climate threat to sink in, writes Rens van Tilburg in De Groene Amsterdammer.

In a comprehensive review of the role of central banks in responding to the climate emergency, Tilburg examines the history of central banks in responding to major crises and calls central bank independence the second casualty of war. While the abuse of money creation leads to “chaos and decay”, those in power can re-appropriate this power the money creation in an emergency, he says.

“The way out may be to create new money on a global scale,” Tilburg concludes, arguing for the consideration of an international “climate coin” currency, backed by emissions reductions.

This page was last updated January 21, 2022

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