The Climate Institute has accused banks of ignoring the risks of climate change in their lending practices. In a new report on climate change and the financial services industry, the institute has called on the banks to take a more proactive approach to the issue by including natural peril risks in their credit risk assessments.Banks have a role to play in limiting the stock of vulnerable residential property, the report said.The premise of the report, "There Goes the Neighbourhood", is that an increasing proportion of the homes built in Australia are vulnerable to flood, cyclone and bushfire, as well as the growing risks of storm surge, land slip and coastal erosion. "Australia is highly exposed to climate change, which will exacerbate these risks," it said.The institute's view is that banks have a role in managing the social and economic impacts of climate-related disasters. They could encourage homeowners to incorporate better resilience in their homes and they could ensure good policy in the property developments they finance.However, the industry is not acting. "Even when financial institutions and public authorities possess information about current and future risks, they are sometimes unwilling or unable to share it will all affected parties," the report said."Foreseeable risks are allowed to perpetuate. At best, banks apply a post-hoc approach to managing risks, such as reviewing underwriting polices on housing in flood or storm prone areas."The institute estimates that coastal erosion poses a threat to A$88 billion of property. It cited a detailed study of Townsville, which concluded that 4400 houses were at risk from rising sea levels by the end of this century.It said banks have a preoccupation with short-term risks and fear bad publicity if they limit credit.It cited the Australian Bankers Association submission to the Natural Disaster Insurance Review in 2012, which followed widespread flooding in Queensland and Victoria the previous year. The ABA said banks operated in a competitive market and it was up to them to manage their own lending decisions. "Additionally, while it may appear that some risks are large, in reality these risks may be inconsequential from a banking loss perspective," the ABA said.Lending losses in relation to non-insurance or under-insurance of houses affected by Victorian and Queensland floods "have been negligible" the ABA said.The institute consulted with a number of banks and encountered similar responses. Large lenders said their portfolios were sufficiently diversified that no single disaster would be material. They also said full-recourse loans stopped mortgagors from walking away from their loans and that most of a property's capital gains accumulate because of the land value rather than the building.The institute called on banks to explore the risks in their loan books in detail, something it claimed has not been done.