FILE PHOTO: FILE PHOTO: The Wall Street sign is pictured at the New York Stock exchange (NYSE) in New York City, United States
NEW YORK: Senior Wall Street bankers are warning that a plan by US regulators to rewrite the rules of tax-equity investing will deliver a major blow to a market dominated by JPMorgan Chase & Co and Bank of America Corp (BofA).
At issue is the perceived risk of tax-equity investments, which are a form of financing in which banks provide capital to green projects in exchange for tax credits.
It’s a market in which JPMorgan and BofA have been estimated to do more than 50% of the roughly US$20bil worth of annual transactions.
Last July, the three agencies that decide bank capital requirements in the United States – the US Federal Reserve (Fed), Federal Deposit Insurance Corp (FDIC) and Office of the Comptroller of the Currency (OCC) – unveiled what’s come to be known as the Basel 3 Endgame.
Their goal is to wrap up the sweeping regulatory overhaul that started after the financial crisis of 2008, and ensure that banks have enough capital to see them through the next market meltdown.
A part of that broader proposal is a requirement that banks quadruple the risk weights they assign to tax-equity investments, forcing them to significantly raise the amount of capital they set aside for renewable-energy projects.
Dermot McDonogh, chief financial officer at Bank of New York Mellon Corp, said if the rule goes ahead, it will “severely reduce” or even “eliminate” the capacity of banks to invest in renewable-energy projects, according to a written consultation response.
It’s an assessment that’s in line with warnings put forward by the clean-energy industry and legal experts.
Law firm Clifford Chance has warned that the risk-weight proposal would make it “prohibitively expensive” for banks to continue doing certain tax-equity investments, which is “certain to have a harmful” impact on green finance.
Acore, a trade group that represents renewable project developers, has said the plan threatens to “derail the clean-energy transition”.
Bank of America and JPMorgan declined to comment for this story.
In connection with an earnings call earlier this month, JPMorgan’s chief financial officer, Jeremy Barnum, said regulators “should just be aware of the likely consequences of what’s happening here and make sure that the results are intentional and that we’re looking around the corner a little bit.”
Last year, JPMorgan, Bank of America and Wells Fargo & Co were involved in one of the largest single asset tax-equity financings ever, with a US$1.2bil allocation to an offshore wind project intended to provide renewable energy to Massachusetts.
Barnum warned in October that JPMorgan is already rethinking such deals, in light of the risk-weight proposal.
Wall Street has been particularly vocal in its criticism of the wider Basel 3 Endgame proposal, warning that it will hit everything from mortgage lending to small-business loans.
The campaign has been public and coordinated, encompassing everything from attack ads to appearances on Capitol Hill.
The Fed, FDIC and OCC published their proposal last July. On average, US banks with at least US$100bil in assets face a 20% increase in their capital requirements.
Banks are currently required to assign a 100% risk weight to tax-equity investments. The Basel 3 Endgame proposal would raise the risk weight for equity investments, including tax-equity investments, to 400% from 100%.
Responses submitted by a Jan 16 consultation deadline reveal the scenarios Wall Street is now anticipating. Crucially, bankers expect the planned risk-weight rules to undermine many of the green tax credits that the Biden administration’s landmark climate law, known as the Inflation Reduction Act (IRA), sought to streamline.
US wind and solar developers have relied on tax-equity financing for years, with the IRA underpinning the model.
But since most green-project developers don’t have tax liabilities that are big enough to take advantage of available tax benefits, they often end up selling equity stakes to a bank, which can then claim federal tax credits against that investment.
Opposition to the proposed risk-weight regulations is so intense that there’s now speculation the Fed, FDIC and OCC will need to make changes before proceeding, according to industry executives.
Wall Street’s “hope” is that the proposal is “either completely revised” or “very materially” reworked, Jane Fraser, Citigroup Inc’s chief executive officer, said when asked about the planned risk weights in connection with the bank’s quarterly results. — Bloomberg
