Small American banks could suffer catastrophic losses from climate-related weather disasters, a first-of-its-kind study finds. Report It comes from a nonprofit that works on climate change, and they’re unaware of the risks.
According to First Street, property damage from floods, wind, storm surge, hail and wildfires pose a combined threat of $2.4 billion for nearly 200 national banks, averaging 1.5% of these banks’ total portfolios. Most of this risk is concentrated among small regional and community banks. In fact, nearly one-third of regional banks face significant climate risks. But larger financial institutions are no exception, with one-quarter facing similar risks, the report found.
“While risk exposure varies, all banks, regardless of size, had some degree of climate risk within their lending activities,” said Jeremy Porter, head of climate impacts at First Street. luck“The most vulnerable were regional, small, and community banks with portfolios concentrated in areas prone to floods, wildfires, and hurricanes. But some of the larger banks also faced risks significant enough to merit further scrutiny.”
First Street conducted its analysis by looking at the extreme weather risk in banks’ locations and using that as a proxy for the commercial and residential properties the banks lend on.
Nearly one-third of U.S. banks are exposed to climate-related risks that could reduce the value of their assets by 1%, a level the Securities and Exchange Commission defines as significant.
“As a public company, if there’s an item that could potentially take away 1% of your value, you have to report it,” First Street CEO Matthew Eby said. “On average, all of these smaller banks and community banks have a lot of exposure. [would] Everybody has to report it.”
Why banks don’t know
The SEC’s 1% rule is currently on hold as it faces legal challenges, but in any case, the rule and other financial reporting requirements exempt small banks. Experts say many of these institutions likely don’t know how risky their portfolios are. And the rapid rise in weather disaster costs, which are expected to rise exponentially as climate change worsens, shows why understanding such risks is important. Since the 1980s, floods, wildfires, hurricanes and other weather disasters have caused increasingly greater economic damage in areas not previously affected by weather disasters.
Hurricane Debbie, which battered Florida and the Carolinas last month before heading up the East Coast, caused an estimated $1.4 billion in property damage. In the United States.The End $2 billion in CanadaBy some estimates, this was the most expensive event in Quebec’s history. Reinsurance News attentionBut First Street’s analysis Found About 80% of the damage occurred outside FEMA’s historical flood warning areas, suggesting that affected properties were less likely to have flood insurance, reducing owners’ ability to survive catastrophic financial losses.
Such financial losses, repeated across hundreds or even thousands of properties, could be catastrophic for small banks with unpaid loans concentrated in specific regions. One bank that First Street identified as high risk has most of its branches in coastal New England, an area that has been hit by devastating floods for two consecutive years and is expected to be affected by climate change. exacerbating extreme weather.
“If you lose 14 to 15 percent of your residential or commercial real estate portfolio after insurance payments, you have the potential for bank failure because there’s no way you have the reserves to withstand that,” Eby said.
“Financial institutions are a really big concern because if they fail in a financial crisis, it affects all other companies, as opposed to a single company failing,” he added.
Unknown unknowns
Climate risk is a concern for banks of all sizes, but the smallest financial institutions have the least ability to identify and price the risk, said Clifford Rossi, a former Citigroup Inc. risk chief who now heads the Smith Enterprise Risk Consortium at the University of Maryland.
“There are a lot of other influences on smaller banks: dealing with competitive pressures from larger banks that are impacting economies of scale, being particular about how they manage their assets, falling interest rates … these are top of mind,” he said.
Rossi questioned First Street’s methodology and warned against making quantitative estimates of banks’ losses based on branch locations, saying the numbers could vary widely.
“There is certainly some risk in these portfolios, but we don’t know how much,” he said.
He added that all banks should feed address, longitude, latitude and commercial property data into climate models to assess physical risk and conduct portfolio analysis at the loan level.
Regarding estimates, he warned, “We have to be careful about saying the sky is falling when we don’t have the best analysis yet.”
But such analysis is time-consuming and difficult for even the largest institutions. The Federal Reserve Board this spring test To examine the extent to which the six largest US banks (Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo) perceive climate risks.
Answer: Not really.
The banks said they did not have reliable information on the types of buildings they owned, insurance coverage, weather impacts or climate modelling data.
First Street’s Porter said the new analysis “underscores the need for all banks, financial institutions and asset owners to actively integrate climate risk into their broader risk management frameworks.”
“Climate risk exists in these portfolios and it is measurable. The Federal Reserve, Securities and Exchange Commission and other regulators already recognize this risk through stress tests, and it is only a matter of time before mandatory reporting becomes standard practice.”
