EUROPEAN banks are factoring climate risks into the terms of mortgages they grant, although they do not fully grasp the potential costs, according to their top regulator.
The European Central Bank (ECB) found that loans secured by real estate in “high climate risk areas” were more expensive than loans with the same characteristics in “safer” regions.
The ECB is pushing lenders to prepare for potential losses from extreme weather or for the possibility that corporate clients that do not adapt to climate risk may go out of business.
The fallout from so-called physical risks has been on display in eastern and central Europe this month following severe flooding.
Properties in areas that are prone to such hazard events “are increasingly vulnerable and could see a decrease in their collateral value”, Frank Elderson, an executive board member at the ECB, told bankers and journalists on Monday (Sep 23) in Frankfurt.
While lenders take such risks into account, the effect is “economically small,” he noted.
“It seems that the climate-related risk is still under-priced by the average bank.”
The findings are part of a paper the ECB will publish in the coming weeks, Elderson added. BLOOMBERG
