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Floods and financial stability: Scenario-based evidence from below sea level

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Listed:
  • Francesco Caloia
  • David-Jan Jansen
  • Kees van Ginkel

Abstract

We study whether floods can affect financial stability through a credit risk channel. Our focus is on the Netherlands, a country situated partly below sea level, where insurance policies exclude property damages caused by some types of floods. Using geocoded data for close to EUR 650 billion in real estate exposures, we consider possible implications of such floods for bank capital. For a set of 38 adverse scenarios, we estimate that flood-related property damages lead to capital declines that mostly range between 30 and 50 basis points. We highlight how starting-point loan-to-value ratios are one important driver of capital impacts. Our estimates focus on property damages as the main transmission channel and are also subject to a number of assumptions. If climate change continues, more frequent floods or flood-related macrofinancial disruptions may have stronger implications for financial stability than our estimates so far indicate.

Suggested Citation

  • Francesco Caloia & David-Jan Jansen & Kees van Ginkel, 2023. "Floods and financial stability: Scenario-based evidence from below sea level," Working Papers 796, DNB.
    • Handle: RePEc:dnb:dnbwpp:796
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    References listed on IDEAS

    as
    1. Klomp, Jeroen, 2014. "Financial fragility and natural disasters: An empirical analysis," Journal of Financial Stability, Elsevier, vol. 13(C), pages 180-192.
    2. Aimilia Pistrika & Sebastiaan Jonkman, 2010. "Damage to residential buildings due to flooding of New Orleans after hurricane Katrina," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 54(2), pages 413-434, August.
    3. David-Jan Jansen, 2023. "Homeowners and flood risk: A disconnect between awareness and actions?," Working Papers 791, DNB.
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    6. Francesco Caloia & David-Jan Jansen, 2021. "Flood risk and financial stability: Evidence from a stress test for the Netherlands," Working Papers 730, DNB.
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    8. Jantsje M. Mol & W. J. Wouter Botzen & Julia E. Blasch & Hans de Moel, 2020. "Insights into Flood Risk Misperceptions of Homeowners in the Dutch River Delta," Risk Analysis, John Wiley & Sons, vol. 40(7), pages 1450-1468, July.
    9. Beltrán, Allan & Maddison, David & Elliott, Robert, 2019. "The impact of flooding on property prices: A repeat-sales approach," Journal of Environmental Economics and Management, Elsevier, vol. 95(C), pages 62-86.
    10. Vermeulen, Robert & Schets, Edo & Lohuis, Melanie & Kölbl, Barbara & Jansen, David-Jan & Heeringa, Willem, 2021. "The heat is on: A framework for measuring financial stress under disruptive energy transition scenarios," Ecological Economics, Elsevier, vol. 190(C).
    11. Francesco Caloia, 2022. "Borrower-Based Measures, House Prices and Household Debt," Working Papers 738, DNB.
    12. Beltrán, Allan & Maddison, David & Elliott, Robert J R, 2018. "Is Flood Risk Capitalised Into Property Values?," Ecological Economics, Elsevier, vol. 146(C), pages 668-685.
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    14. Hansen, Lars Peter, 2022. "Central banking challenges posed by uncertain climate change and natural disasters," Journal of Monetary Economics, Elsevier, vol. 125(C), pages 1-15.
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    More about this item

    Keywords

    floods; financial stability; real estate; credit risk; climate change;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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