The Economist (2022-01-08)

The Economist January 8th 2022 Finance & economics 63

markets. The green­bond standard, for
one, is expectedtousethetaxonomyasits
benchmarkforeligibility.Thecommission
will probablyalsousetheclassificationas
it doles moneyouttomemberstatesfrom
its RecoveryFund,someofwhichislinked
to greenery.
The  degreeofdetailandstringencyof
Europe’s  approach couldhelp make the
taxonomytheglobalgoldstandard.Other
countriesoutsidetheblocareworkingon
schemes  oftheirown.Eachwillprobably
be  moulded by political compromises,
geostrategicconcernsandcarbonpledges.
But  foreign companies, asset managers
and bankscouldendupadoptingtheeu’s
taxonomyanyway,becausetheirEuropean
clients  mayneedthemtoreporttheright
data,  so  asto producetheirowndisclo­
sures.  Somemaylobbytheirowngovern­
ments to limitdivergence.
Whetherallthisisenoughtochannel
funds towardstherightinvestmentsisan­
other  question.Oneimmediate problem
relates  to implementation: because of
missed deadlines,green­financefirmsare
being askedtoreportontheircompliance
with  the  taxonomybeforecompaniesare
required  toprovidetheunderlying data,
making thejobdifficult.
A  bigger drawbackisthetaxonomy’s
limited coverage.Atpresentitappliestoa
subset  ofeconomicactivities.Disclosure
requirementsalsoletsmallpubliccompa­
nies,  andallprivateones,offthehook.
Morningstar,a researchfirm,reckonsit
will affectjusthalfoffundassetsintheeu
(excluding private vehicles). That leaves
much  inthedark atatimewhenlisted
giants,  includingminersandutilities,are
rushing  todivest theirdirtiestassetsto
private investors.Moremaycometolight
as the eu’s reportingrequirementsexpand
to  cover  newcompanies,some ofthem
private. Butthatwilltaketime.
The  biggestproblemliesintheflawed
expectationthatthemereexistenceofthe
taxonomywillalterinvestors’preferences.
A project’sgreeneryisjust“onedatapoint”,
says  DavidHenryDoyleofs&p, arating
agency.  Creditworthiness, interest rates
and  earningsprospectsmaymattermore.
The  classification,notably,createsnoin­
centive  forbackinggreenassetsthatare
starved  of funding, such as low­carbon
steel  or  electric­carchargingstations.In­
stead investorsmaycontinuetochasesafe,
liquid assetssuchaswindorsolarplants,
jacking  upprices.Greenisgood,butitis
not enough.n

America’sfinancialrules

Regulatory flex

“P

owergrab”.An“attempttopoliti­

cise our regulators for their own

gain”. “Extremist destruction ofinstitu­

tionalnorms.”Therhetoricflyingaround

Washingtonsoundslikethecriticismonce

levelledagainstPresidentDonaldTrump

abouthot­buttonissuesfrombordersecu­

ritytopollutioncontrols.Instead,itisRe­

publicanswhohavedirectedthesebarbsat

Democrats in recent days, focused on

somethingthat,onthesurface,seemsfar

duller:theFederalDepositInsuranceCor­

poration,theagencytaskedwithprotect­

ingsaversfrombankbusts.

Astheheatedlanguagesuggests, the

stakesareinfacthigh.Alongwithinsuring

bankaccounts,thefdicisoneoftheinsti­

tutions that approves bank mergers in

America.Thatmakesita crucialplayerin

theBidenadministration’splanstoimpose

stricterrulesonthefinancialsystem.And

theDemocratshavenowtakenfullcontrol

ofit aftera nastyboardroombattle.

Democrats alreadyheld three offive

seatsonthefdic’s board,whichshouldin

theoryhaveletthemhavetheirway.But

thechairwoman wasstill JelenaMcWil­

liams,a respectedlawyerappointedbyMr

Trump.Shehadthepowertosettheagenda

formeetings.TheDemocratsallegedthat

sheusedittoblocka reviewofthepolicy

forbankmergers—whichshehasdenied.

The dispute exploded publicly last

monthwhentwoDemocratsontheboard,

including Rohit Chopra, director of the

ConsumerFinancialProtectionBureau,at­

temptedtoworkaroundMsMcWilliams.

TheyannouncedthattheDemocraticma­

jorityhadvotedfora reviewofbank­merg­

errules,withouthersupport.MsMcWil­

liamscounteredthattherehadnotbeena

validvote.InanarticleintheWallStreet

Journal, sheaccusedthemofplotting“a

hostiletakeoverofthefdic”. OnDecember

31st,withtheboardsplitbeyondrepair,she

announcedherresignation.

Theclashisa windowontotheefforts

ofprogressiveswithintheDemocraticpar­

tytomaketheirmarkontheinstitutions

overseeingtheeconomy.MrChopraisan

allyofElizabethWarren,a senatorwhoisa

championoftheDemocrats’leftwing.Oth­

ers liked by Ms Warren—notably, Lina

Khan,headoftheFederalTradeCommis­

sion,andGaryGensler,chairmanoftheSe­

curities and ExchangeCommission—are

alsoinkeyroles.

Progressiveshavenotwonalltheper­

sonnel  fights.  Saule  Omarova,  their  pre­

ferred  candidate  to  lead  the  Office  of  the

Comptroller  of  the  Currency,  a  banking

regulator,  withdrew  from  the  nomination

process in December after Republicans de­

criedherasa “radical”.Thereappointment

ofJeromePowellasheadofthe Federal Re­

servewasanotherdisappointment for the

left.Yetwiththreeseatsopen on the Fed’s

board, progressives can make  inroads.

Most crucially, MrBiden is expected  to

nominate Sarah Bloom Raskin,  another

preferredcandidateofMsWarren,  as  the

Fed’s vice­chairwoman for supervision,

themostimportantregulatory post in the

financialsystem.

What do the progressives  hope  to

achieve?It isalreadyclearthat they want to

curbbigtech.Therowatthefdicreveals

thattheyalsointendtolimitthe formation

ofbigbanks.Fornowthereview  of  the

bank­mergerpolicyisjusta request for in­

formation.Butthequestionsposed by Mr

Chopraina blogpostinDecember leave lit­

tle doubt about his desired  direction:

“Should financial institutions  that  rou­

tinely violate consumer­protection  laws

beallowedtoexpandthrough acquisition?

...Howshouldwemakesurethat a merger

doesnotincreasetheriskthat a bank is too

bigtofail?”

Many bank analysts like the  idea  of

midsizedAmericanfirmsbanding togeth­

ertotakeonthebigfour(JPMorgan Chase,

BankofAmerica,Citigroupand Wells Far­

go).Progressiveswouldarguethat this gets

thingsbackwards. Ifthe power  of  giant

banksimperilsfinancialstability, the cre­

ationofyetmoregiantswould only exacer­

batethat,saysoneofficial.Other possible

changesincludeintegratingclimate  con­

cernsintofinancialregulation and beefing

upsomecapitalrequirements. Democrats

will,asever,needtosurmount legislative

andlobbyinghurdlestomake  anyofthis

happen.Butwiththefdicnow  firmlyin

theirgrasp,thepathisa littleclearer.n

WASHINGTON, DC

A boardroom bust-up reveals Joe

Biden’s distaste for big banks

McWilliams makes an exit

Correction: In last week’s article on winners and
losers from the pandemic, the calculations
underlying our league table contained errors for
Japan’s household income and Greece’s public debt.
As a result, America should in fact be ranked ninth
(not tenth), Canada tenth (not 11th) and Japan 21st
(not equal 20th). Sorry. For the full ranking, see
economist.com/winnersandlosers