[rad-green] Bloomberg: Which Is Scarier, Climate Change or Collateralized Loan Obligations (CLOs)?

*https://www.bnnbloomberg.ca/which-is-scarier-climate-change-or-clos-1.1333981
<https://www.bnnbloomberg.ca/which-is-scarier-climate-change-or-clos-1.1333981>Bloomberg
News          October 19, 2019Which Is Scarier, Climate Change or CLOs?*
*By Elisa Martinuzzi, Bloomberg News*

[image: WASHINGTON, DC - SEPTEMBER 13: Teenage Swedish climate activist
Greta Thunberg delivers brief remarks surrounded by other student
environmental advocates during a strike to demand action be taken on
climate change outside the White House on September 13, 2019 in Washington,
DC. The strike is part of Thunberg's six day visit to Washington ahead of
the Global Climate Strike scheduled for September 20. (Photo by Sarah
Silbiger/Getty Images)]

*WASHINGTON, DC - SEPTEMBER 13: Teenage Swedish climate activist Greta
Thunberg delivers brief remarks surrounded by other student environmental
advocates during a strike to demand action be taken on climate change
outside the White House on September 13, 2019 in Washington, DC. The strike
is part of Thunberg's six day visit to Washington ahead of the Global
Climate Strike scheduled for September 20. (Photo by Sarah Silbiger/Getty
Images) , Photographer: Sarah Silbiger/Getty Images North America*

Call it the Greta effect. Global finance titans gathered at the annual
International Monetary Fund meetings in Washington this week
identified climate change as a key risk to the long-term health of the
world economy. It was one of the hot topics discussed, perhaps partly
inspired by the teenage activist who has made saving the environment a
cause celebre. But a more immediate concern within bankers’ wheelhouses was
also prominent on their worry list: Record levels of corporate borrowings,
tucked away in hidden pockets of the financial system, have the potential
to do great damage.

The IMF warned that as much as $19 trillion of corporate debt — or nearly
40% of total borrowings by companies in major economies — may be at risk
of default in the event of a severe economic slowdown. Since 2009,
corporate speculative-grade debt as a percentage of gross domestic
product has soared in China and risen in the U.S., and with rates low,
investors have been taking on more risks to boost returns. While banks may
not have much of this risky debt on their own books, 80% of non-bank
financial institutions are now as vulnerable as during the global financial
crisis, according to the IMF. That number is up from 60% in April.

The risk is that losses could cascade through the banking and non-banking
financial sectors, amplifying the shock of any downturn, said the IMF. And
so it’s rightly calling on regulators to toughen and intensify their
supervision of banks and non-bank financial institutions. Reviewing banks’
lending practices and carrying out targeted stress tests is already within
supervisors’ remit and they should heighten their guard. Mapping out as
much of the interconnectedness as possible should be a priority for
supervisors.Of particular concern is the leveraged-loan market, which has
grown to more than $1.2 trillion, and where there are signs that investors
are already becoming anxious. This includes collateralized loan
obligations, or CLOs, pools of risky loans that are bundled and sold in
tranches. The Financial Stability Board is conducting a review of CLOs,
with the aim of mapping out the owners of the securities and examining the
potential implications of clients pulling out money in a downturn in a
market now totaling more than $600 billion. The results can’t come soon
enough.

That isn’t to say looking after the planet isn’t important. The IMF’s new
chief, Kristalina Georgieva, who pioneered green bonds in 2008 while at the
World Bank, is setting an ambitious agenda and provoking debate on climate
change. Discussing whether assigning different risk weightings to assets
that are more or less green fosters an important discussion that engages
the financial community. Unsurprisingly, bankers are all too keen for green
incentives that would lighten their capital demands. For now, though, the
focus should be on setting common standards and definitions, and on a push
toward mandatory disclosures. In the absence of those, identifying future
risks and opportunities is an imperfect science.

Which is scarier: climate change or CLOs? The fact is, both pose major
global risks and demand attention. All due respect to Great Thunberg,
but the corporate-debt time bomb is the more imminent threat.

To contact the author of this story: Elisa Martinuzzi at
[email protected]

To contact the editor responsible for this story: Beth Williams at
[email protected]

This column does not necessarily reflect the opinion of the editorial board
or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is
a former managing editor for European finance at Bloomberg News.

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