The Office of Financial Research and Climate Risk

What? Never heard of the OFR. Great! Let's take a look.

This is the first of a series of posts on the Office of Financial Research which sits under the Department of Treasury. In this post, I give very brief backstory on the office and some notes on the evolution of their annual reports to Congress.

In a later posts, I will apply a more critical lens on the most recent report released this month and some overlap in interests among the work cited by the OFR, the Council it advises, business interests and the general political spectacle that is climate finance.

The Office of Financial Research

Which brings me to a new report by the Office of Financial Research (OFR), a group under the Department of Treasury that provides data and analysis to support the work of the Financial Stability Oversight Council. As the name implies, the Council’s purpose is to “identify risks to the financial stability of the United States that could arise from the material financial distress or failure.”

Congress created the Council and the OFR with the Dodd-Frank Act of 2010. [The same Act also created the Bureau of Consumer Financial Protection and the Federal Insurance Office (FIO)]. Support for the legislation came overwhelmingly from Democrats.

The Director of the OFR is appointed by the president [Sec. 152(b)]. So, politicization of their work would not be surprising. In general review of the all the OFR Annual Reports to Congress since 2012 there are several consistencies through the years and things that stand out related to current events (e.g. conflicts between Russia and Ukraine, the end of LIBOR, and Brexit).

Cybersecurity risk leads in reporting consistency over the years. As the report notes in 2018, “We first discussed the risks to financial stability from cybersecurity incidents in our inaugural 2012 Annual Report. We have identified them every year since.” The concern continues. Frankly, that we don’t publicly talk more about cybersecurity it surprising and it appears, via OFR reports, a serious vulnerability identified annually over the course of three administrations.

Where in 2019, the OFR had a rather hum drum report (less of course, cyber), the 2020 Report provided a general rundown of upheaval across the board due to COVID-19. The pandemic led the OFR into a brief discussion about the cost of extreme weather events and wildfires but carefully hedged the discussion with debate about the connection of these events to climate change. It notes that the BoE plans on including exploratory climate change scenarios and further, “Challenges to quantifying such risks persist, according to the FSB.”

The following year, the OFR highlighted Biden’s EO 14030 Climate related Financial Risk and the Treasury Secretary’s leadership in assessing climate risks in financial stability as chair of the Council. Climate related risk featured prominently in the report and the OFR dove head first into climate change risks, “but not enough is known to judge the threats these risks pose to U.S. financial stability.”

The OFR waves away historical record, “Regardless of past data necessary for these studies, historical data may be minimally relevant in helping to predict future effects of climate change.” And so, the OFR announced their Climate Data and Analytics Hub pilot. (And note: not a cybersecurity data hub, but whatever.)

The 2022 report, released this month, went full throttle on climate risk as a threat to US financial stability. And by climate risk, the OFR explicitly means climate change, “Climate-related financial risk is the risk of financial losses due to rising global temperatures and accompanying environmental shifts, such as rising sea levels and more severe weather events.”

So, not, as contemplated in 2019, the burdensome losses from extreme weather events attributed to social and physical vulnerabilities in our urban spaces prone to extreme weather. But only those losses as a result of climate change.

The distinction is important. Defining climate related risk specifically in the context of climate change: 1) muddles cause and effect for disaster losses, 2) evades accountability for the reasonableness of climate and loss predictions, and 3) challenges the applicability or “intelligibility” of those modeled risk estimates to the physical asset level.

That OFR took this route is not surprising. Much of the discussion takes place within the overall framework for climate-risk disclosures, the primary policy objective to Biden’s EO 14030. Remember the clear ability for the OFR to be politicized by allowing the research directer to be a presidential (i.e. political appointee).

The 2019 report offers a glimpse at the efforts of federal agencies to organize under the EO. The head of all the groups listed are voting members of the Financial Stability Oversight Council of which the OFR serves to inform.

In a later post, I will provide some observations found in the fine print on how muddled, unreasonable, and unintelligible this all appears.