High Water, No Marks? Biased Lending after Extreme Weather

45 Pages Posted: 30 Mar 2020

Date Written: March 20, 2020

Abstract

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

Garbarino, Nicola and Guin, Benjamin, High Water, No Marks? Biased Lending after Extreme Weather (March 20, 2020). Bank of England Working Paper No. 856, Available at SSRN: https://ssrn.com/abstract=3564226 or http://dx.doi.org/10.2139/ssrn.3564226

Nicola Garbarino (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Benjamin Guin

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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