As we await the next iteration of the Volcker ban on investments deemed excessively risky for banks, other regulations continue to incentivize selective risk-taking by banks. Last month, for example, the Office of the Comptroller of the Currency issued a bulletin encouraging bank investments in wind energy.
Banks are permitted by statute to "make investments directly or indirectly . . . designed primarily to promote the public welfare, including the welfare of low- and moderate-income communities or families (such as by providing housing, services, or jobs)." There are some constraints on these investments, including a prohibition against banks taking on unlimited liability. Certain renewable energy investments qualify as public welfare investments. These investments give banks access to renewable energy tax credits to offset taxable income, allow banks to benefit from renewable energy subsidies, and can be qualified investments under the Community Reinvestment Act.
Last month's OCC fact sheet reminded banks of the benefits of investing in wind projects. One of the two approved projects highlighted by the OCC was a fund that would finance six windmills and thus would purportedly benefit low- and moderate-income "individuals and areas by allowing students at a technical college to pursue careers in the renewable energy sector." The OCC cautions that "the bank should have the requisite expertise and risk management capabilities to make these investments." As the last crisis reminded us, when regulators tip the scale in favor of a particular type of investment, it tends to dull bankers' risk management faculties.