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Finance News

Fed Predicts Declined Asset Prices Due to Rising Valuations

The Federal Reserve makes a bold statement stating that rising prices in the stock market and other sectors threaten the financial system. The statement came out in the central bank’s semi-annual Financial Stability Report. The bank stated that the overall system has stabilized during the pandemic; however, the future holds several risks. The most prevalent one in the lot is the aggressive run of the stock market.

If the risk appetite falls from the current level, numerous assets will be subject to a sharp decrease in market price. The development will put a massive burden on the financial system. Such situations will turn into reality if the pandemic recovery phase stalls, leading to pressurizing businesses and households.

Investors worldwide are snapping up bonds, cryptocurrencies, and equities. They are depositing billions of dollars into blank-check organizations (SPACs), causing the market to stay brisk for standard IPOs (initial public offerings). Fed’s financial stability report back in November 2020 also flagged high asset valuations. The latest report states how risk-taking potential is rising in both bond and equity markets. It notes a bunch of high leverage and opaque risk, especially in hedge funds and related sectors.

Lael Brainard (Fed Governor) stated that the current situation specifies the importance of ensuring the system is properly guarded. She emphasized banks are increasing their capital needs during the economy’s expansion to cope with the downturns. Brainard continued that risks surrounding the risk appetite are surging. The valuation charts have continued to increase, and combined with high corporate indebtedness, can increase the effects caused by a re-pricing happening.

As per the report, multiple sectors like hospitality, travel, and energy possess the most issues due to their sensitivity. Open-end funds and the money market are not exempt from the risks either. The 1.7 trillion dollars findings in the student loans also pose restricted risks to the financial system. The reason being the majority of the debt is owned by 40% of the top earners.

A recent survey by Fed showcased how pandemic-related issues are the biggest threats, followed by the resistance towards vaccination. The next on the line was increasing interest rates, rising inflation, and the tension between China and the US.

While the financial industry is stabilizing right now, the Federal Reserve Bank highlights the dormant risks in the sector. As per Fed’s semi-annual financial stability report, the assets might experience severe price decreases if the valuations keep rising. If the risk appetite showcased by investors starts to decline, the results can be disastrous for the economy.

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Finance News

CitiGroup to Pledge $250 Billion in Environmental Finance

One of the world’s biggest finance corporations, Citi Group, has announced a five-year plan with new investments to be made towards sustainable business growth and low-carbon economy. According to the announcement, Citi will invest around $250 billion in environmental finance in the next five years. Being a leader in the banking sector, the organization aims to direct this triple-digit billion-dollar investment towards the 2025 Sustainable Progress Strategy plan and the goal is to fund climate solutions around the world. 

In the next few months, the bank would be running all its establishments across the world on 100% clean energy through renewable electricity and by the end of 2020, all buildings owned by CitiGroup and its subsidiaries across the world would be running on sustainable green power. 

The planned $250 billion environment investment will be diversified into sustainable operations, climate risk mitigation, and low-carbon transitions. 

Sustainable Operations: This strategy sets some fourth-generation goals focused on operating businesses with clean energy, reusable water, controlled GHG emissions, waste reduction, and sustainable building solutions. By 2030, the organization aims to trim the global CO2 emissions by 45% and accelerate its work in the timeline after 2025.

Climate Risk Mitigation: The organization plans to manage, measure, and reduce its operational portfolio and clientele on the climate. By encouraging low-carbon transition, the organizations would invest majorly in sustainable business portfolios over high-profit carbon-heavy propositions. Citi will also participate in the Partnership for Carbon Accounting Financials, a global network of financial institutions that checks and reveals the CO2 emissions of every lending portfolio through standardizing carbon accounting methods.
Low-carbon Transition: The principal goal of this plan is to offer finance and facilitation services to renewable energy businesses only. Citi will fund businesses supporting green technology, clean energy, high water quality, improved resource conservation, and eco-friendly transportation. It will also promote the adoption of green buildings, zero-carbon economy, and energy-efficient solutions on land use and agriculture.