The Biden administration is using legal ambiguity and the uncheckable power of the administrative state to unilaterally impose its climate change agenda. The ambiguities of the Dodd-Frank Act are being exploited to justify expanding the regulatory powers of so-called independent financial regulatory agencies in ways never before contemplated by Congress. Self-serving interpretations of ill-defined concepts like “systemic risk” are being used to justify new financial regulations that will penalize greenhouse gas-intensive activities by executive order, without congressional hearings or new authorizing legislation.
Following the latest financial crisis caused by the housing bubble, the Dodd-Frank Act introduced new financial regulations designed to mitigate financial “systemic risk”. By oversight or design, the law has never defined systemic risk despite the 39 times the term appears in the 849-page legislation.
The act required the Federal Reserve to impose new regulations to mitigate systemic risk created by “systemically important financial institutions” and permitted that because of their corporate structure, activities, or practices, other financial institutions could be sources of systemic risk if they deemed it necessary. by the Financial Stability Supervisory Board. By never objectively defining the term systemic risk, the law has created an ambiguity that the board can exploit to designate institutions, activities or practices as a source of systemic risk – a designation that requires federal financial regulatory agencies to enact new regulations to mitigate risk.
The Biden administration took the opportunity to assert that climate change poses a systemic risk to the financial sector. An October report from the council “identified climate change as an emerging and growing threat to U.S. financial stability” and recommended that “members take further action on climate change data, disclosure, and analysis.” climate change scenarios”, as a prelude to the imposition of new regulations to discourage investment by banks and capital markets in greenhouse gas intensive activities.
To regulate something, it must first be measured. The administration plans to use greenhouse gas emissions data that will be produced by the Securities and Exchange Commission’s proposed requirement that all public companies disclose their emissions (using the GHG protocol) in their mandatory periodic filings with the SEC. Using this data, financial regulators will invoke Dodd-Frank powers to design new surtaxes on banks’ capital requirements to discourage emissions-intensive lending, design capital fund rules investment to cap emissions of the securities that mutual funds can hold and take other regulatory measures to prevent investments in emissions-intensive activities, all under the guise of mitigating systemic risk to the financial system .
Congress has never granted the executive branch or independent financial regulatory agencies the power to regulate nonfinancial businesses using federal financial regulation. Can we stop this “Operation Climate Change Choke Point” plan of war against fossil fuels through financial regulation? Maybe, but not quickly.
The systemic risk provisions of the Dodd-Frank Act apply to banks, federally regulated financial institutions and non-bank financial institutions designated as “systemically important”. by the council. The latter must be non-bank companies “primarily engaged in financial activities”. The Climate Change Risk Council Report argues that companies emitting greenhouse gases are the source of systemic risk. However, these companies are primarily non-financial in nature and therefore not subject to the provisions of the Dodd-Frank Act.
The Biden administration could counter this argument by claiming that it has not designated emissions-intensive companies as systemic, but rather has determined that companies involved in emissions-intensive activities pose a risk of increased credit due to climate change transition risk. Transition risk is the risk that a company’s revenues or costs will be adversely affected by future government policies or regulations, or due to a decline in demand resulting from changing consumer preferences. This ambiguous concept of transitional risk is conjectural and not based on specific historical experiences. It could be applied to any business to justify any political objective.
The allegation mirrors “reputational risk” allegations that were used to discourage bank lending to gun shops, payday lenders and legal pornography providers in “Operation Choke Point” by the Federal Deposit Insurance Corporation and the Department of Justice under the Obama administration. . Using climate change transition risk to stifle lending to companies involved in legal but politically disadvantaged activities is a clear abuse of regulatory power.
If the administration succeeds in imposing “Operation Climate Change Choke Point” on emissions-intensive companies, there are at least three avenues that could be used to overturn the new rules. The likelihood of succeeding in undoing regulations once they are imposed is uncertain, and the time required to undo these rules could prove critical. The longer the rules have been in place, the greater the decline in climate change consultants taking advantage of the rule and companies that have incurred significant costs to comply.
The quickest way to undo any new regulations on systemic climate change risks would be for Congress to pass a resolution of disapproval using its powers under the Congressional Review Act. If 30 senators sign a petition to consider disapproval, debate on the motion is limited and the resolution would receive a Senate vote. If the resolution is also passed by the House, the Speaker’s signature is required to rescind the by-law. Also, the Congressional Review Act can only be used to overturn a regulation within a short time after the final regulation has been published in the Federal Register or delivered to Congress.
After the midterm elections, the 118and Congress could pass new legislation that reverses any new emissions-focused financial regulations imposed by the administration. Again, this legislation would need to be signed by the president before becoming law. Clearly, both congressional approaches have a long chance of success under President Biden.
A determination of systemic risk can also be challenged under the Administrative Procedures Act and there is precedent for this slow form of judicial remedy. In 2014, the board designated Metlife Inc., a systemically important non-bank financial institution. Metlife fought the designation using the Administrative Procedures Act and prevailed when the court found the decision to be arbitrary and capricious.
The Biden administration’s plan to penalize emissions-intensive activities using the powers of independent financial regulatory agencies is an abuse of power facilitated by poorly drafted legislation and weakly accountable independent federal agencies. before Congress. It is time for members of Congress to reassert their authority and neutralize the abuse of power by the administrative state.
Paul Kupiec is a Senior Research Fellow specializing in banking and finance issues at the American Enterprise Institute.