It’s somewhat disappointing to see the parsimonious response of our big banks to the bushfire catastrophe, particularly when you consider the hundreds of millions of dollars they lavished on lawyers when they were hauled before the Hayne royal commission.
One might have thought they would have seen the bushfire emergency as an opportunity to repair their tattered reputations in the community, but their pledges of support for fire-ravaged communities have been meagre compared to the donations from some private individuals and philanthropic organisations.
National Australia Bank appeared to be taking a more open-handed approach on Tuesday, when it announced it would allow its personal, business and farming customers a three-year reprieve in which to rebuild their finances in the wake of the devastating destruction.
NAB said it would defer interest and principal repayments for up to three years for customers affected by the catastrophic fires, and pledged not to foreclose on properties or force customers to sell assets in that period.
But NAB’s rivals were quick to point out that the offer from Melbourne-based bank was less magnanimous than it appeared. That’s because unpaid interest would be added to the customers’ outstanding loan amounts, which would continue to rise.
What’s more, they noted that most banks already have policies in place that ensure that they don’t foreclose or force the sale of properties for a period of three years following a natural disaster.
All the same, NAB’s move is likely to force other major banks to publicly announce increased financial support for customers affected by the bushfire, including for farmers and tourist-dependent businesses that have seen their cash flows decimated by the disaster.
Westpac, for instance, is expected to announce discounted interest rates for business customers during the rebuilding phase.
Analysts estimate that the big banks would feel little pain on their bottom line from announcing more generous measures for their hard-hit customers. That’s because major population centres have so far been spared the massive blazes, and the size of commercial loans in the affected regional areas is relatively small.
Of course, this would quickly change if the bushfires were to spread into the Sydney Basin.
In contrast, the insurance industry is already suffering from a spike in natural disaster claims. Treasurer Josh Frydenberg is leaning on local insurers to make sure they don’t drag their feet when it comes to assessing the 8500 claims – worth some $700 million – that they have received since the bushfires began in September. .
Insurance Australia Group – which owns NRMA – said last week it expects to pay $400 million for natural disaster claims from the second half of 2019, which is more than 60 per cent of its annual $640 million budget for “perils”.
The impact of the increasing incidence and severity of natural catastrophes as a result of climate change is, of course, a growing preoccupation not only for the financial industry but also for central bankers and regulators.
It’s telling that Mark Carney, the outgoing boss of the Bank of England, used his final interviews in that role to stress two key points.
The first, as he told the Financial Times, is that central banks are running out of the ammunition they need to fight economic downturns.
“If there were to be a deeper downturn [that requires] more stimulus than a conventional recession, then it’s not clear that monetary policy would have sufficient space,” he said.
Mr Carney argued that companies and financial institutions needed to justify their continued investment in fossil fuels.
But his second point is more urgent action needs to be taken on climate change. In an interview with BBC Radio late last year, Mr Carney argued that companies and financial institutions needed to justify their continued investment in fossil fuels, warning that many assets in the sector could end up “worthless”.
But while Mr Carney has been criticised for speaking out on the financial risks associated with climate change, he’s far from a lone voice.
Local regulators are also keeping a close eye on the financial risks to banks and insurance companies stemming from global warming, and have sent a clear signal to boards they are taking climate change risk seriously.
Speaking at a conference in May last year, Geoff Summerhayes, head of insurance at the Australian Prudential Regulation Authority, said the financial risks of climate change were no longer a niche concern and would soon be fundamental to every financial decision an APRA-regulated firm makes.
“In the future, there will not be sustainable finance and other finance – all finance will need to be sustainable”, he said. “Ultimately there will only be one form of finance, and that will be green finance.”
In the future there will not be sustainable finance and other finance – all finance will need to be sustainable.
— Geoff Summerhayes, APRA
He added that APRA didn’t view climate change as a moral issue, but as a risk that was “distinctly financial in nature”.
Speaking at the same conference, ASIC commissioner John Price stressed that climate change was “a legally foreseeable risk facing many different companies in a range of different industries”.
He added ASIC was particularly concerned with adequate disclosure of climate risk.
“Where the law requires the disclosure of climate risk, needless to say it should be done in a way that’s useful and relevant to the market”, he said. “Where climate risk is material, we’re actively encouraging directors and advisers to provide voluntary disclosure to the market.”
But the most insightful contribution to the debate on the economic and financial impact of climate change has come from Guy Debelle, the deputy governor of the Reserve Bank of Australia.
In an important speech he gave in March last year, Dr Debelle argued that there were likely to be “first-order economic effects” as a result of climate change.
Financial stability risks would inevitably arise if some asset prices fell sharply.
“Insurers may face large, unanticipated payouts because of climate change-related property damage and business losses”, he said. “In some cases, businesses and households could lose access to insurance.”
There was also the risk that pollution-generating companies could suffer reputational damage or legal liability, or that regulatory changes could make previously valuable assets uneconomic.
“All of these consequences could precipitate sharp adjustments in asset prices, which would have consequences for financial stability.”
Dr Debelle also pointed out that “the scale, persistence and systemic risk of climate change” would also affect the Reserve Bank’s conduct of monetary policy.
Central bank adjusts monetary policy to keep the economy in balance. For instance, faced with positive demand shock – which pushes up output and prices – central banks routinely tighten policy.
But, he said, climate events are supply shocks, which means they reduce output, but increase prices.
And that, as Dr Debelle said, “is a much more complicated monetary policy challenge because the two parts of the RBA’s mandate, output and inflation, are moving in opposite directions”.
Historically, the RBA has looked through the impact on prices from supply shocks on the assumption that they would be temporary.
What if droughts are more frequent, or cyclones happen more often? The supply shock is no longer temporary but close to permanent.
— Guy Debelle, RBA deputy governor
But this approach if climate events are temporary and discrete. The calibration of monetary policy becomes a lot more complicated when climate change is a trend.
“What if droughts are more frequent, or cyclones happen more often? The supply shock is no longer temporary but close to permanent”, Dr Debelle said.
“That situation is more challenging to assess and respond to.”