It was announced this morning that JP Morgan is going to take over First Republic, following its seizure over the weekend by the Federal Deposit Insurance Corp. NBC News has more:
The Federal Deposit Insurance Corp. announced simultaneously Monday morning that it had seized the bank and that JPMorgan Chase, the largest bank in America, would be purchasing substantially all of the bank’s assets and deposits.
A spokesperson for the Treasury Department sought to reassure the markets and the public after First Republic, with $229.1 billion in total assets at the time of closure, eclipsed Silicon Valley Bank ($209 billion at the time of closure) to become the second-largest bank failure in American history.
First Republic becomes the third U.S. bank to go under in the past two months, the first being Silicon Valley Bank and the second being Signature Bank. Is this another case of ’Get Woke, Go Broke’? Many commentators blamed the collapse of SVB on the fact that its directors seemed more focused on burnishing their woke credentials than managing existential risks, singling out the head of Financial Risk Management at SVB’s U.K. branch, Jay Ersapah, who acted as the Chief Risk Officer for SVB in Europe, Africa, and the Middle East. She launched initiatives such as the company’s first month-long Pride campaign and published a blog emphasising mental health awareness for LGBTQ+ youth.
Can the same be said of First Republic? Unlike SVB, First Republic did have a Chief Risk Officer in the U.S. – Stephanie Bontemps. On First Republic’s website it says of her: “Taking a strategic and tactical approach to Environmental, Social, and Governance expectations is a top priority including assessing the impact of climate change and related risk management.”
She wasn’t the only senior employee of the bank to prioritise ESG. In 2021, it became the first large U.S. bank to stop lending to the fossil fuels industry, proclaiming it has become ‘carbon neutral’ that same year. Last month, the Washington Examiner published a good piece setting out how an obsession with ESG had prompted senior executives and board members of SVP, Signature and First Republic to focus on ‘climate risk’ at the expense of other, more prosaic risks to banks, such as making sure your assets cover your liabilities.
Even Credit Suisse, the most systemically important bank to fail thus far, believed in “sustainable finance for a better world” and did its part to direct capital toward the achievement of the United Nations’ Sustainable Development Goals for 2030. The Swiss bank also actively promoted its transgender “allyship” by having a high-profile, non-binary, gender-fluid section head within its Global Markets Technology group.
In response, the hashtag “GoWokeGoBroke” has gone viral over the last month. But sustainability activists have been quick to argue that ESG was not the direct cause of any of the recent bank collapses. Technically speaking, this is a valid point. Rising interest rates, hot deposits, and faulty asset-liability management doomed Silicon Valley, Signature, and First Republic, whereas Credit Suisse was a slow-motion, scandal-ridden management train wreck for years.
Nonetheless, the recent spate of bank failures may still spell the end for ESG on Wall Street since, in all of the above cases, a corporate focus on ESG was more than just a distraction and time-sink for executives and employees. It was symptomatic of more deep-seated fundamental operating problems with these financial institutions, and clearly a comorbidity of weak management.
Touting one’s sustainable finance credentials now correlates with bad ‘G’ governance under the ESG system’s own rubric. It raises a red flag for analysts to perform enhanced due diligence around any financial firms that fully embrace ESG. Shareholder activists scoping out poorly run corporate targets and hedge funds looking for short candidates should probably start including a pro-ESG filter in their initial screening criteria.
Worth reading in full.
While it’s true that rising interest rates were a more direct cause of the failure of all three banks, that, in turn, is because central banks, such as the Federal Reserve and the Bank of England, have been distracted from their goal of managing interest rates by various political objectives, such as putting incentives in place to encourage financial institutions to invest in various green initiatives. The folly of thinking central banks should be extending their role in this way was the focus of a recent piece in Forbes by Tilak Doshi.
With British inflation clocking in at 10.1 percent, or over five times the level targeted by the Bank of England, criticisms of the central bank’s remit to support “net zero” climate goals have been coming in thick and fast, as Bloomberg reported on Tuesday. The article was headlined: “Scrap Bank of England’s Climate Mandate, Balls and Osborne say.”
One of the key architects of UK central bank independence, Ed Balls – an adviser to former Chancellor of the Exchequer Gordon Brown when the Labour Party made the bank independent in 1997 – said it “doesn’t make any sense” to give the BOE a role for which it has no tools. “It concerns me, the idea that you start to throw into the mix objectives which aren’t really affected sensibly by the instrument the bank has – which is interest rates.” Bloomberg also reported that Paul Tucker, a former BOE deputy governor, and John Vickers, a former BOE chief economist, suggested that net zero has been a distraction.
Mr. Balls was speaking at the House of Lords’ economic affairs committee inquiry into the independence of the BOE on Tuesday. At the meeting, ex-Conservative Chancellor George Osborne agreed with Balls. Both were of the view that climate goals should be stripped from the Bank of England’s remit to remove any distractions from its focus on inflation and financial stability. Failing to prevent double-digit inflation, critics argue that the bank should not distracted by such policy “baubles”.
Worth reading in full.
Obviously, it’s possible to exaggerate the role of wokery pokery in bringing down these banks. But their failure, as well as the recent failures of the Fed and the Bank of England, will surely prompt a rethink about ESG. Bankers should forget about sustaining the planet and focus on sustaining the banking industry.
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