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From flood to fire: is physical climate risk taken into account in banks’ residential mortgage rates?

Author

Listed:
  • Fontana, Adele
  • Jarmulska, Barbara
  • Schwarz, Claudia
  • Scheid, Benedikt
  • Scheins, Christopher

Abstract

Physical climate risks can have a large regional impact, which can influence mortgage loans’ credit risk and should be priced by the lenders. Motivated by the relevance of climate change for financial intermediaries, our paper aims at analysing if physical climate risks are being reflected in residential real estate loan rates of banks. We show that on average banks seem to demand a physical climate risk premium from mortgage borrowers and the premium has increased over recent years. However, there is significant heterogeneity in bank practices. Banks that were identified as “adequately” considering climate risk in the credit risk management by the ECB Banking Supervision charge higher risk premia which have been increasing particularly after the publication of supervisory expectations. In contrast, the lack of risk premia of certain banks shows that ECB diagnostics in the Thematic Review on Climate were accurate in identifying the banks that need stronger supervisory focus. JEL Classification: G12, G21, Q51, Q54, R32

Suggested Citation

  • Fontana, Adele & Jarmulska, Barbara & Schwarz, Claudia & Scheid, Benedikt & Scheins, Christopher, 2025. "From flood to fire: is physical climate risk taken into account in banks’ residential mortgage rates?," Working Paper Series 3036, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253036
    Note: 1598185
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp3036~43450e2b8f.en.pdf
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    More about this item

    Keywords

    asset pricing; bank lending standards; climate change; residential mortgage backed securities; residential real estate;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis

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