27 March 2023 – An assessment of our largest banks’ residential mortgage exposures to flooding risk has advanced our understanding of the financial stability risks posed by climate change.
The results furthered the initial findings published in our November 2022 Financial Stability Report and assessed the impact of both coastal flooding risk from sea level rise nationwide, and the risks associated with flooding caused by excessive rainfall in Auckland.
Deputy Governor Christian Hawkesby says the exercise modelled the financial risk associated with increasing frequency and severity of flood events through the channels of declining insurability and the values of at-risk properties. Various ‘sensitivities’ of changes in property values were modelled by the banks – as opposed to modelling the impact of an individual flood event.
“We have all seen the devastating impact of the recent upper North Island floods and Cyclone Gabrielle. Although this exercise was conducted before these catastrophic events, they emphasise the importance of conducting these types of exercises to help manage these risks in the future,” Mr Hawkesby says.
The results show that the banks’ capital ratios are resilient to the most severe flood sensitivities in the exercise when each shock is considered in isolation. However, we have more work to do to understand how flood risk could potentially compound with other risks to the financial system, such as the risks borne by recession.
“As flood risk increases, the financial system is likely to face simultaneously a broader range of climate-related risks, such as global and national transitions risks, including from more stringent emissions pricing over time. Our forthcoming Climate Stress Test, will further improve our understanding of the combination of these risks to banks’ balance sheets. The scenario for that stress test is due to be published later this year,” Mr Hawkesby says.
The main purpose of these exercises is to support banks to build their capability to identify climate risks and find solutions to the significant data and modelling challenges involved. In turn, this will lead to more proactive management of climate risk.
More information
2022 Flood risk assessment for residential mortgages https://govt.us20.list-manage.com/track/click?u=bd316aa7ee4f5679c56377819&id=e8a8d16504&e=f3c68946f8
