High Water, No Marks? Biased Lending after Extreme Weather
45 Pages Posted: 30 Mar 2020
Date Written: March 20, 2020
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.
Keywords: Climate, flooding, house prices, mortgages
JEL Classification: D12, G21, Q51, Q54
Suggested Citation: Suggested Citation