2022 Flood risk assessment for residential mortgages

The financial system is exposed to a range of risks from climate change. Financial institutions have been making progress towards identifying and understanding these risks over the last few years. To build on industry efforts, last year we undertook risk assessments of the largest banks in Aotearoa New Zealand as part of our stress testing programme, covering banks’ residential mortgage and agricultural exposures. The main purpose of these exercises is to support banks to build their capability to identify climate-related risks and find solutions to the significant data and modelling challenges involved. In turn, this will lead to more proactive management of climate risk. We published an early excerpt of the results from the residential mortgage risk assessment in the November 2022 Financial Stability Report that focussed on banks’ residential mortgage exposures that are at risk of flood damage. This article provides the financial effects of flood risk on banks’ residential mortgage loan loss provisioning and total capital from the exercise. It also highlights insights from the associated qualitative information provided by banks that will help inform risk management and mitigation. The purpose of publishing these findings is to support those who are currently working to better understand, manage and mitigate these risks, including financial institutions that did not participate in the exercise, as well as for general interest.