Sarah Bloom Raskin’s withdrawal from consideration for the Federal Reserve Board’s vice chair for supervision is an unfortunate win for the fossil fuel industry over proper bank regulation. It’s widely known that Republicans and the oil and gas sector fought Raskin’s nomination because she stated what Jerome Powell and Randal Quarles have said, that federal bank regulators must address climate-related risks to banks and the financial system. But there is another reason they opposed her nomination: She has a reputation as a smart, principled and extremely qualified bank regulator, and proper bank regulation itself is a threat to many fossil fuel companies.
This nomination fight was part of a broader industry strategy to resist reasonable bank regulation and ask financial regulators for bailouts.
The oil and gas industry is highly risky to lend to, in part because of the volatile nature of oil and gas prices. In April 2020, the refiner acquisition cost of crude oil plummeted 40% from just a month earlier as the pandemic gripped the world. Rapidly decreasing prices for renewable energy sources also threaten to push oil and gas prices — and firms — into terminal decline.
Additionally, many oil and gas firms are fiscally mismanaged. Some of the top exploration and production firms don’t earn enough cash to cover capital and operating expenses. Today’s spiking oil prices are partially a product of investors pulling back after getting burned by deeply unprofitable shale oil production in the 2010s.
Banks that have not properly managed this risk have paid the price. In the 1980s, hundreds of Southwestern banks failed, costing the Federal Deposit Insurance Corp. billions, as declining oil prices led to problems with energy loans made under mistakenly optimistic assumptions.
Because of all of this, sound and unbiased rules are needed for managing risk but are a threat to these energy companies. For example, in 2016, the Office of the Comptroller of the Currency made technical changes to its manual for bank examiners on loans to oil and gas producers. It required banks to treat loans to more indebted oil and gas companies more skeptically. The oil and gas industry strenuously objected, with one law firm describing the reaction as “angst and consternation.” Indeed, an analysis of the 58 largest independent oil and gas producers showed that only five could get loans considered “safe” under the new guidelines.
Four years later, the Independent Petroleum Association of America attempted to use the pandemic as an excuse to roll back the guidance. The group argued that the guidance was limiting banks’ ability to lend to struggling producers. The OCC demurred, and rightly so. The guidance was working as intended, keeping banks from making excessively risky loans.
The industry met with more success elsewhere. It pressured the Treasury Department and Federal Reserve to change the rules of COVID relief programs to help oil and gas companies. Raskin has correctly criticized the Fed for giving in to the industry, as Fed emergency programs are supposed to be designed to protect the financial system, not to bail out companies that were already failing before a financial crisis hit. Because of this decision, many oil and gas companies were able to secure private-sector financing and emerged from the pandemic financially much better off than they were going in. The Fed did exactly what it insists it doesn’t do: It picked winners and losers.
The industry has also pushed financial regulators to fight voluntary bank decisions to decarbonize, or merely avoid risky loans. In recent years, many banks have made commitments to meet climate targets. These announcements have alarmed the fossil fuel industry and its allies. In response, the American Legislative Exchange Council, a fossil-fuel-funded corporate advocacy group, launched a campaign pushing states to punish banks that curtail support for fossil fuels. Laws based on this model have passed in Texas and advanced in the West Virginia legislature. And 18 Republican state treasurers, auditors and comptrollers recently sent an open letter to the “U.S. banking industry” threatening to deny state business to any bank that divests from fossil fuels.
When former President Donald Trump opened up drilling in the Arctic National Wildlife refuge, major U.S. banks ruled out financing projects on the lands, derailing a planned auction of lease rights. In response, Alaska’s congressional delegation — all major recipients of fossil fuel donations — pushed Brian Brooks, who was then comptroller of the currency, to propose a rule that would have banned banks from refusing to make loans to the fossil fuel industry. Fortunately, the Biden administration prevented the rule from taking effect.
Most recently, of course, oil and gas companies defeated the nomination of Raskin, a highly qualified regulator with broad support, including from the banking industry. They did it because she would have engaged in proper, effective risk regulation, including on climate-related financial risks — and because she would not abuse her role to allocate capital to oil and gas firms or anyone else. We should expect no less from any regulator, but many fall short. Raskin was the most qualified person in the country for the job, which also made her the most threatening. And that’s why they rallied against her.
