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 are not even aware of the risk.
According to First Street, property damage from floods, wind, storm surges, hail or wildfires pose a total threat of $2.4 billion to nearly 200 national banks, which represents an average of 1.5 percent of the total portfolio value of these 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 are not immune either: one in four is exposed to such risks, according to 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 analysis by examining weather risks at banks’ physical locations and using those as a proxy for the commercial and residential properties on which banks have lent.
Almost a third of the country’s banks are exposed to climate-related risks that could reduce the value of their holdings by one percent. This is the threshold 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 these small banks and community banks has so much risk that they [would] everyone has to report it.”
Why banks don’t know
The SEC’s 1% rule is currently on hold as it faces legal challenges – but regardless, small banks are exempt from this and other financial reporting requirements. Experts say many of these institutions probably don’t know how risky their portfolios are. And the skyrocketing costs of Weather-related disasterswhich are expected to rise dramatically, Climate change is worseningshow why it is so important to understand such risks. Since the 1980s, floods, wildfires, hurricanes and other weather disasters have caused increasingly large financial losses, many in areas that were previously immune to weather disasters.
Hurricane Debby, which devastated Florida and the Carolinas last month before move up the east coastcaused an estimated property damage of 1.4 billion dollars in the USA. and more 2 billion dollars in CanadaAccording to estimates. (It was the most expensive event in Quebec history, Reinsurance news noticed.) But an analysis by First Street found Nearly eight-tenths of the damage occurred outside FEMA’s historic flood plains, meaning the affected buildings likely did not have flood insurance and their owners were less able to withstand a catastrophic financial loss.
When such financial losses are repeated across hundreds or thousands of properties, they can spell disaster for small banks whose loans are concentrated in a particular area. One bank rated as high-risk by First Street has most of its branches on the New England coast, a region that devastating floods one after the other for the last two years and where climate change is expected 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 able to identify and price this risk, says Clifford Rossi, a former Citigroup Risk officer who now leads the Smith Enterprise Risk Consortium at 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 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 analysis of its portfolio by feeding address, longitude and latitude data and commercial real estate into a climate model to assess 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 this type of analysis is time-consuming and difficult, even for the largest institutions. This spring, the Federal Reserve released the results of a check to determine how aware America’s six largest banks are –Bank of AmericaCitigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanleyand Wells Fargo – were aware of their climate risks.
The answer: Not very.
According to the banks, they did not have reliable information about the type of buildings they owned, their insurance coverage, their exposure to the weather or data from climate models.
The new analysis “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.”