High water, no marks? Biased lending after extreme weather
Nicola Garbarino and
Journal of Financial Stability, 2021, vol. 54, issue C
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)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:54:y:2021:i:c:s1572308921000346
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