Banks need to focus more on the climate risks in their mortgage portfolios, which have increased with the growing frequency and severity of floods, storms and fires, the Reserve Bank says.
The RBA’s head of domestic markets, Jonathan Kearns, said banks need to start collecting and analysing loan data to model the financial impacts of climate events.
To date, banks’ climate disclosures have tended to focus on their own emissions and the net-zero targets of corporate clients that are big emitters. Now the RBA has put home lending on the agenda.
Speaking at the Credit Law Conference in Sydney yesterday, Kearns said: “New housing mortgages are typically for 25 years, while business loans are often for three to five years. Over these horizons, the effects of climate change are likely to be significant but are also very uncertain.
“In practice, most mortgages have a shorter effective life because the borrower refinances, moves or pays the loan off early. But if climate change makes a home’s location less desirable and significantly reduces its value, the borrower may have less opportunity to refinance or upgrade their property. The lender may then find that the loan on that property has a much longer realised maturity and the collateral backing the loan has a lower value.”
Kearns said another challenge for banks is that borrowers may not be able to insure their properties due to the impacts of climate change, either because the insurer won’t cover the property or the cost is too high.
The lower collateral value of an uninsured house will increase the expected loss-given-default of climate impacted properties.
Kearns said banks have less experience than insurers modelling these impacts, which is something they need to address.
APRA has been working with the five largest banks on a climate analysis project called the Climate Vulnerability Assessment – the first time that climate risks have been analysed in a co-ordinated manner.
Kearns said the five banks gave APRA the results of their analysis in May and APRA will publish the results later this year.