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High water, no marks? Biased lending after extreme weather

Nicola Garbarino and Benjamin Guin

Journal of Financial Stability, 2021, vol. 54, issue C

Abstract: Policymakers have put forward proposals to ensure that banks do not underestimate long-term risks from climate change. To examine how lenders account for extreme weather, we compare matched repeat mortgage and property transactions around a severe flood event in England in 2013–14. First, lender valuations do not “mark-to-market” against local price declines. As a result valuations are biased upwards. Second, lenders do not offset this valuation bias by adjusting interest rates or loan amounts. Third, borrowers with low credit risk self-select into high flood risk areas. Overall, these results suggest that lenders do not track closely the impact of extreme weather ex-post, and that public flood insurance programs subsidize high income households in some areas.

Keywords: Climate; Flooding; House prices; Mortgages (search for similar items in EconPapers)
JEL-codes: D12 G21 Q51 Q54 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jfs.2021.100874

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Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

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