From flood to fire: is physical climate risk taken into account in banks’ residential mortgage rates?

Adele Fontana, Barbara Jarmulska, Claudia Schwarz, Benedikt Scheid and Christopher Scheins

No 3036, Working Paper Series from European Central Bank

Abstract: Physical climate risks can have a large regional impact, which can influence mortgage loans’ credit risk and should be priced by the lenders. Motivated by the relevance of climate change for financial intermediaries, our paper aims at analysing if physical climate risks are being reflected in residential real estate loan rates of banks. We show that on average banks seem to demand a physical climate risk premium from mortgage borrowers and the premium has increased over recent years. However, there is significant heterogeneity in bank practices. Banks that were identified as “adequately” considering climate risk in the credit risk management by the ECB Banking Supervision charge higher risk premia which have been increasing particularly after the publication of supervisory expectations. In contrast, the lack of risk premia of certain banks shows that ECB diagnostics in the Thematic Review on Climate were accurate in identifying the banks that need stronger supervisory focus. JEL Classification: G12, G21, Q51, Q54, R32

Keywords: asset pricing; bank lending standards; climate change; residential mortgage backed securities; residential real estate (search for similar items in EconPapers)
Date: 2025-03
Note: 1598185
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp3036~43450e2b8f.en.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253036

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().