ECB wipes 45% off home prices in harshest bank climate test
European banks have been told to assume that real-estate assets most exposed to flood risk could lose almost half their value, as the sector's resilience to climate change is stress-tested over the coming months.
The European Central Bank is factoring in a 45% slump over a single year for property values in areas that are likely to experience bad flooding, Fernando de la Mora, a managing director at Alvarez & Marsal, told Bloomberg ahead of the expected publication of the ECB's scenarios later this week. That would leave German and Dutch banks among the most exposed.
An ECB spokeswoman declined to comment on the details of the stress test.
Europe, which was left in shock last year after floods devastated parts of western Germany and Belgium, is pushing banks to brace for potential losses as global warming and its political fallout send tremors through the wider economy. The ECB review is one of the most detailed of its kind to date, and examines everything from the impact of higher carbon prices to the implications of greater home energy efficiency for the mortgage market.
"What's more concerning are the physical risks," said de la Mora, who's working with lenders to guide them through requirements laid out in the stress tests.
An ECB review last year found that 22% of euro-area bank exposures face high physical risk, more than half of which are related to wildfires, with floods making up the bulk of the remainder. The review by the central bank in September found that Austria, the Netherlands, Germany and France are more exposed to flooding, while wildfires pose a bigger threat in Italy and Spain.
For real estate assets facing a low risk of flooding, the ECB assumes a 5% drop in value, according to de la Mora. The central bank's drought scenario is "more manageable" and entails an economic hit from lower...