Study Finds Banks Increasingly Shifting Climate Change Risk Onto Taxpayers

Chris Gaetano
Published Date:
Nov 4, 2019

A recent study has found that banks are managing their climate change risk exposure by shifting it into taxpayer-funded institutions, according to MarketWatch. The paper, written by Amine Ouazad, a professor in the department of applied economics at HEC Montreal, and Matthew Kahn, a professor at Johns Hopkins University, laid out the mechanism by which banks offload risky mortgages by selling them to Fannie Mae and Freddy Mac, government-controlled mortgage guarantors. 

Essentially, banks originate mortgage loans for coastal properties likely to be affected by climate change-related flooding and hurricanes. Since they are private entities, they are able to price this risk into the cost of the loan. When this risk grows, however, they then resell the mortgages to Fanny Mae and Freddy Mac. As taxpayer-supported entities whose mission is to expand home ownership in the United States, they are unable to price in climate risk in the same way as the banks that sold them the mortgages. This has the effect of moving the risk from the bank to the taxpayers.

And, according to the paper, the risks are material: the researchers found that the odds of an eventual foreclosure rose by 3.6 percentage points for a mortgage originated in the first year after a hurricane, and by 4.9 percentage points for a mortgage originated in the third year. The banks seem to understand this as well, as the paper noted that in areas hit by hurricanes between 2004 and 2012, with at least $1 billion in damages, lenders increased by almost 10 percent the share of coastal mortgages offloaded to Fannie and Freddie.

Other studies have also noted that climate change could present significant financial disruptions in the future. For instance, the Federal Reserve Bank of Richmond quantified the impact of rising temperatures by looking at state-level economies. It concluded that every 1 degree rise in mean summer temperature reduces states' economic growth rate by 0.154 percent. The Richmond Fed also released a study saying climate change could stunt U.S. economic growth by one third over the next century, based on the impacts that rising temperatures have already had on the economy and extrapolating from there.

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