Transition Risks and Opportunities in Residential Mortgages

Franziska Schütze

No 1910, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: A range of studies has analysed how climate-related risks can impact financial markets, focusing on equity and corporate bond holdings. This article takes a closer look at transition risks and opportunities in residential mortgages. Mortgage loans are important from a financial perspective due to their large share in banks’ assets and their long credit lifetime, and from a climate perspective due to their large share in fossil fuel consumption. The analysis combines data on the energy-performance of buildings with financial data on mortgages for Germany and identifies two risk drivers – a carbon price and a performance standard. The scenario analysis shows that expected credit loss can be substantially higher for a “brown” portfolio compared to a “green” portfolio. Taking climate policy into account in risk management and strategy can reduce the transition risk and open up new lending opportunities. Financial regulation can promote such behaviour.

Keywords: Mortgages; residential buildings; carbon risks; transition risks; valuation; climate policy scenarios; policy and regulation (search for similar items in EconPapers)
JEL-codes: G21 Q48 Q56 Q58 R38 (search for similar items in EconPapers)
Pages: 24 p.
Date: 2020
New Economics Papers: this item is included in nep-ene, nep-env, nep-eur and nep-rmg
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