Banks are more weather-prone than subprime mortgages, researcher says


Climate change poses a greater risk to bank balance sheets than the subprime mortgage crisis that contributed to the Great Recession, according to the co-author of a new study on the vulnerability of commercial lending.

The study, led by sustainability nonprofit Ceres and published last week, found that up to 10% of the value of U.S. commercial loans from major banks are at risk of being wiped out by the effects of the floods, fires, extreme heat and hurricanes.

“There is more risk on bank balance sheets due to the weather than there was to risky housing,” study co-author Steven Rothstein said in an interview with The Hill. “And it took us eight to ten years to come out of this recession. “

But there is still time – and there are many tools – for banks to adapt and “meet the moment,” Rothstein added.

“Banks have huge financial risk because of climate change – and huge financial opportunities,” Rothstein said. The opportunity, he said, comes from the rapid growth of new business areas such as electric vehicles and green power generation, which offer “more lending and underwriting opportunities.”

The past few weeks have illustrated the rising cost of hurricane-related damage on the Gulf Coast and East Coast, as well as the Dixie Fire in California.

“Last week alone we had floods and hurricanes on the east coast that cost tens of billions of dollars and over 70 lives,” Rothstein said.

Such risks could put $ 250 billion a year at risk for some of the largest banks, according to the report – and pose an existential threat to many smaller and community banks as they tend to be more concentrated in a specific geographic area. and therefore disproportionately exposed to local devastation caused by forest fires, hurricanes and floods.

In a scenario in which the world does not adapt – what Ceres calls a “greenhouse” scenario in her study – the value at risk is around 3% per annum of all assets in the group surveyed. This could translate into risks for a larger part of the economy than the subprime mortgages that led to the 2008 financial crisis.

And unlike subprime mortgages, there is no easy way for banks to divest themselves of risky assets, Rothstein said, because climate risk is so prevalent in the economy.

The risk is particularly severe for smaller banks, which “lend in their towns and communities, within a 10 to 15 mile radius,” Rothstein said. “So if, God forbid, a fire affects their community, it affects everyone.”

According to Rothstein, the climate has become “not only a social responsibility, but a fiduciary responsibility”. This means that it is no longer just “nice to think about”, but directly infringes on the legal responsibility of banks to protect the material interests of their customers.

“You can’t look at the stability of banks or insurance companies without considering the climate,” Rothstein said. “It’s not the only thing, but to consider it, you have to have good information. And we, as a society, don’t have good information.

There are steps banks can start taking now, Rothstein said, to address risk on their books, such as incorporating the same risk forecasting models into their loan approvals that insurance companies have. developed, he said.

“We appreciate the work they do,” Rothstein said. “But they have to do more. As President BidenJoe Biden Biden opposes Newsom on eve of recall: “Nation’s eyes are on California” Biden turns to climate to sell economic program Family of American held hostage by Taliban urges administration to fire the peace negotiator in Afghanistan MORE said, this is a red alert situation.

It is also important, he said, that the whole banking industry moves together. If a single bank asks its customers to come up with a decarbonization plan, “they go to another factory”.

But “if all of them do … well, there are 300 coal-fired power plants that have closed because they can’t get funding,” he added. “We have to make it expensive, so if you’re considering a fossil fuel commitment in coal or heavy industry… it’s built into the price.”

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