Climate risk studies raise more questions than answers

It’s boffin week here at Unpacking Climate Risk. On Monday, Tony pontificated on a nerdy academic paper. Now, it’s my turn.

Today’s object of study is ‘The impact of natural disasters on banks’ impairment flow – Evidence from Germany’ in the Journal of Climate Finance. 

Here’s the Cliffs Notes version: the authors used statistical techniques to find out how German banks tweaked their loan-loss provisions (income put aside against failing borrowers) in the wake of the June 2013 flood. This was the country’s worst inundation for at least 60 years, incurring some €6.6bn in direct economic losses and an additional €1.8bn of insured losses.

The paper shows that banks in the flood-affected regions plumped their loan-loss provisions in the years following. This makes sense – their borrowers had to shoulder all kinds of rebuilding and recovery costs after the disaster, leaving less available for loan repayments. 

However, the paper also shows that the build-up of reserves was only temporary, and that within three years banks were releasing them back into income. This suggests that the period of increased credit risk was brief, and that the flood did not permanently degrade the creditworthiness of the drenched borrowers.