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Fed White Paper on Banks & Climate Risk

January 30, 2023

Banks remain in the spotlight for their critical role in the transition to a greener economy.

According to a Federal Reserve paper, the Global Systemically Important Banks (G-SIBs) have made some progress in both climate mitigation and adaptation efforts:

• Mitigation: G-SIBs intend to provide more green financing, with some stating that they would restrict financing to high-emissions industries; and
• Adaptation: Banks are developing more robust risk management strategies.

Yes, but: The paper finds that the banks must accelerate their transition if they are to meet their publicly stated climate goals. The authors note:

All told, despite some progress by large global banks to address climate change considerations, much work lies ahead to properly measure and disclose climate-related risks, and to better align financing activities with their net-zero targets.

Banks are in the unenviable position of having to balance the interests of many different parties. As reported in previous CREFC Policy and Capital Markets Briefings, Republican policymakers are targeting what they perceive as “woke capital,” and intend to grill bank executives on the actions they are taking in the name of climate change.

On the other hand, G-SIBs want to ensure they are appropriately positioned to manage climate risk and to respond to heightened regulatory demands. This year, for example, the six largest banks in the U.S. will undergo pilot climate exercises under the Fed’s supervision. And banks, along with the financial system in general, are awaiting final climate disclosure requirements from the Securities and Exchange Commission.

Contact Sairah Burki (sburki@crefc.org) with questions. 

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CREFC Capital Markets Update Week of 1/30

January 30, 2023

Issuance Picks Up; Spread Tightening Continues

• Private-Label CMBS and CRE CLOs. The first private-label transactions of the year priced last week, consisting of one conduit and one CRE CLO totaling $1.4 billion. Issuance trails the previous year’s tally for the same period by $4.5 billion. Forward activity is picking up with a near-term pipeline that includes two conduits, two CRE CLOs, and one SASB. In addition, Commercial Mortgage Alert reports that issuers are considering bringing some transactions postponed late last year to market.
• The 10-year Treasury yield ended the week 2 bps higher at 3.50%, while CME 1M Term SOFR was up 4 bps on the week to 4.56%. The 10-year Treasury is 170 basis points higher on a year-over-year basis, while CME 1M Term SOFR is 451 basis points higher. Elevated rates were the story of 2022, with financing costs becoming prohibitive for many borrowers, and, combined with continued market volatility, deal collateral became harder to aggregate for issuers.
• Spreads on 10-year on-the-run conduit bonds continued to tighten at lower levels, with AA – A down 20 – 25 bps to 220 – 350 and BBB- down 15 bps to 695. Super-senior AAA bonds were unchanged at 112. Senior AAA CRE CLO spreads tightened 20 bps on the week, ending at 210.   
• Agency CMBS. Agency issuance was also active last week, totaling $2.3 billion. Primary drivers included a $920 million Freddie K transaction, $450 million of Fannie DUS, and $550 million of Ginnie PLs. Agency issuance for 2023 now stands at $5.8 billion, well behind the $16.0 billion for the same period last year. The GSEs ended 2022 falling short of their $78 billion lending cap. In addition to higher rates and reduced acquisition activity, the agencies faced stiff competition from banks, debt funds, and life companies over the past year.

Contact Raj Aidasani (raidasani@crefc.org) for more information

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SALT Caps in Focus

January 30, 2023

Republicans are pushing to extend the $10,000 cap on State and Local Tax (SALT) deductions beyond its 2025 expiration, but two new Republicans on the House Committee on Ways and Means want to reduce the impact of the cap.

Why it matters: Both Michelle Steel of California and Nicole Malliotakis of New York have advocated to repeal the $10,000 cap on State and Local Tax (SALT) deductions, established in 2017.

What they’re saying: Senate Majority Leader Chuck Schumer (D-NY) said he wants Congress to repeal the $10,000 federal cap on SALT deductions, which he called a “nasty measure” aimed at blue states.

What's next: Malliotakis told Bloomberg that she’s exploring changes Republicans can support that would adjust the cap and make it more workable for taxpayers in high-tax states. Increasing the deduction to account for inflation or setting a different cap based on income level could be more realistic than lifting the cap altogether, she said.

Go deeper: NYU Law Professor Daniel Hemel, in an upcoming paper in the Florida Tax Review, argues the SALT cap should apply to passthrough entity owners.

• 27 states allow passthrough business owners to avoid the $10,000 cap by paying entity-level state income taxes.
• The IRS currently allows the workaround, but it could cost the federal government more than $50 billion by the end of 2025, with most benefits flowing to owners of passthroughs who earn $1 million or more.

Please contact Justin Ailes (jailes@crefc.org) with questions.

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Republicans Michelle Steel of California and Nicole Malliotakis of New York are among the newest members of the House Committee on Ways and Means.

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