Climate Change-Related Disasters ‘Not Very’ Impactful on Bank Financial Stability: New York Fed

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A new study from the New York Federal Reserve examining the impact of climate change via extreme weather events on bank financial stability throws cold water on the heated rhetoric around climate change, finding that the threat to banks from natural disasters is trivial while suggesting that a bigger danger to financial institutions comes from policies meant to shield them from such risks.

The Fed report sought to gauge how banks fared against past disasters by examining FEMA-level disasters between 1995 and 2018 and county-level property damage estimates from SHELDUS (Spatial Hazard Events and Losses Database for the United States). The authors concluded the impact was insignificant.

“Not very,” the three authors of the study wrote, positing an answer to the question posed in the title of the report: “How Bad Are Weather Disasters for Banks?”

“We find that weather disasters over the last quarter century had insignificant or small effects on U.S. banks’ performance,” the authors wrote, adding that the stability seems more to do with the intrinsic resilience of financial institutions than any federal aid they may have received in response to extreme weather events.

Profit-Boosting Impact of Disasters

For bigger banks, it turns out that disasters increased loan demand and actually boosted profits, the study says.

“Losses at larger (multi-county) banks are barely affected and their income increases significantly with exposure,” the authors wrote.

Local banks, too, demonstrated resilience to extreme weather events, although the study found they did experience more negative stability impacts from extreme disasters.

“Local banks tend to avoid mortgage lending where floods are more common than official flood maps would predict, suggesting that local knowledge may also mitigate disaster impacts,” the authors wrote.

But even though local banks are more prone to suffering instability impacts from disasters, these were not found to have been significant enough to threaten bank solvency.

“In particular, loan losses and default risk at local banks do not increase significantly,” the authors wrote. “Charge-offs at multi-county banks increase but the impact is very small. Moreover, not all effects are bad; income of multi-county banks increase significantly with disaster exposure.”

By Tom Ozimek

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