Staff Working Paper No. 856
By Nicola Garbarino and Benjamin Guin
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 may subsidise high income households.
This is an online appendix to Staff Working Paper No. 856.