Mortgage lenders called on to start mapping the impact of climate change on portfolios now

Ryan Fowler

March 30, 2021

A flood science specialist has called on all mortgage lenders to start planning now how they will map the impact of climate change on their existing and future portfolios now or face future losses. 

JBA Risk Management’s warning comes ahead of the launch in June of the final details of the Prudential Regulatory Authority’s (PRA) data requirements on the resilience of banks and insurers to climate change.

This year’s stress test, which is part of the Bank of England’s (BoE) Climate Biennial Exploratory Scenario (CBES) and the culmination of a number of BoE directives, is widely expected to be based on a fairly prescriptive requirement, and call for lenders to adopt multiple time horizons, potentially as narrow as five-year intervals up to 2050.

The new stress test recognises the intrinsic link between different players in the financial sector and the need to assess risk in a similar way – mortgage availability often depends on insurability and requires lenders and insurers to be assessing the risk consistently, especially for properties that fall outside of the Flood Re scheme which will also come to an end by 2039.

Vanessa Balmbra, property and financial sector specialist at JBA, said: “The impacts of climate change on flood risk can already be felt today, and it’s vital for lenders to start considering the risk.

“The PRA has indicated that all firms are expected to have embedded their approach to climate risk by the end of 2021, regardless of participation in the stress test, and the direction of travel is clear despite the cost implications for the smaller players.

“There are similar moves afoot across the world, with the European Union presently consulting on its stress test requirements due to be brought in in 2022, and regulatory activity in the US, Asia, and China. Closer to home, Ireland is also expected to follow the PRA’s initiative.”

Robert Stevens, head of property risk for Nationwide Building Society, added: “Flood risk is an important element of understanding the wider and longer-term impacts of climate change on our business and ensures we make safe lending decisions today for the future.

“The flood risk data is a key requirement in being able to respond to the CBES, whilst the drive for this information may be a regulatory one, it also underpins the core climate change lending strategy.

“It is essential to plan ahead, educate and protect the business and our customers from the impact of climate change over the longer-term.”

Balmbra concluded: “We already know from our data that floods are likely to increase in severity and frequency, with average annual loss from flooding forecast to increase by up to 30% by 2040 for UK residential properties, with strong regional differences, so the potential impact on property devaluation in these areas is clear.”

Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland, Santander UK, Standard Chartered and Nationwide Building Society, as well as a select number of insurers, are all set to deliver the results of their climate projection work this September.

The PRA will publish the results of its analysis in quarter one 2022.

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