America’s smallest banks face potentially devastating losses from climate-related weather disasters, an initial study shows. report from a climate change nonprofit. And they usually are not even aware of the chance.
According to First Street, property damage from floods, wind, storm surges, hail or wildfires pose a complete threat of $2.4 billion to almost 200 national banks, which represents a mean of 1.5 percent of the overall portfolio value of those banks. Most of this risk is concentrated in small regional or community banks. In fact, nearly one in three regional banks is exposed to significant climate risk. But large institutions usually are not immune either: one in 4 is exposed to such risks, in accordance with the report.
“Risk exposure varies, but regardless of the size of the institution, all banks had some level of climate risk within their lending business,” said Jeremy Porter, head of climate impact at First Street. Assets“The most vulnerable were regional, small and municipal banks with highly concentrated portfolios in areas prone to flooding, wildfires or hurricanes. But even some of the larger banks were at such great risk that a closer look was required.”
First Street conducted its evaluation by examining weather risks at banks’ physical locations and using those as a proxy for the industrial and residential properties on which banks have lent.
Almost a 3rd of the country’s banks are exposed to climate-related risks that might reduce the worth of their holdings by one percent. This is the brink defined as material by the US Securities and Exchange Commission (SEC).
“If you’re a public company and you have an item that has a 1% potential loss in value, you have to report it,” said Matthew Eby, CEO of First Street. “On average, each of those small banks and community banks has a lot risk that they [would] everyone has to report it.”
Why banks don’t know
The SEC’s 1% rule is currently on hold because it faces legal challenges — but regardless, small banks are exempt from this and other financial reporting requirements. Experts say a lot of these institutions likely do not understand how dangerous their portfolios are. And the skyrocketing costs of weather-related disasters, that are expected to rise dramatically as climate change worsens, show why it is so vital to grasp these risks. Since the Nineteen Eighties, floods, wildfires, hurricanes and other weather-related disasters have caused increasingly large financial losses, many in areas previously proof against weather disasters.
Hurricane Debby, which devastated Florida and the Carolinas last month before moving up the East Coast, caused an estimated $1.4 billion in property damage. within the USA. and more 2 billion dollars in CanadaAccording to estimates. (It was the costliest event in Quebec history, Reinsurance news noticed.) But an evaluation by First Street found Nearly eight-tenths of the damage occurred outside FEMA’s historic flood plains, meaning the affected buildings likely didn’t have flood insurance and their owners were less able to resist a catastrophic financial loss.
When such financial losses are repeated across a whole bunch or 1000’s of properties, they will spell disaster for small banks whose loans are concentrated in a selected area. One bank rated as high-risk by First Street has most of its branches on the New England coast, a region that has experienced devastating flooding up to now two years and where climate change is anticipated to Weather extremes are worsening.
“If you lose 14 or 15 percent of your residential or commercial real estate portfolio after insurance, there’s no way you have the reserves to absorb that. So it’s a potential bank failure,” Eby said.
He added: “The biggest concern is actually for financial institutions, because when they fail in a financial crisis, it affects everyone else, and it’s not as if just one company fails.”
Unknown Unknown
While climate risk is becoming a growing concern for banks of all sizes, the smallest institutions are least in a position to discover and price that risk, says Clifford Rossi, a former Citigroup risk officer who now leads the Smith Enterprise Risk Consortium on the University of Maryland.
“There are so many other things that affect small banks – they’re struggling with competitive pressures from the big banks that are affecting their economies of scale, they’re fixated on managing their assets, interest rates are falling… these things are at the forefront of their minds,” he said.
Rossi questioned First Street’s methodology and warned against quantifying banks’ losses based on branch locations, as this could lead on to widely differing figures.
“These portfolios certainly carry some risk, but we don’t know how much,” he said.
Every bank should conduct a credit evaluation of its portfolio by feeding address, longitude and latitude data and industrial real estate right into a climate model to evaluate physical risk, he added.
Regarding estimates, he warned: “We have to be careful about saying the sky is falling when we still don’t have the best analysis.”
But the sort of evaluation is time-consuming and difficult, even for the most important institutions. This spring, the Federal Reserve released the outcomes of a check to find out how aware America’s six largest banks – Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo – were of their climate risks.
The answer: Not very.
According to the banks, they didn’t have reliable information in regards to the variety of buildings they owned, their insurance coverage, their exposure to the weather or data from climate models.
The recent evaluation “underscores the need for all banks, financial institutions and asset owners to proactively integrate climate risk into their broader risk management frameworks,” said First Street’s Porter.
“Climate risk exists in these portfolios – and it is measurable. The Federal Reserve, SEC and other regulators are already recognizing this risk through stress testing, and it is only a matter of time before mandatory reporting becomes standard practice.”
