Reserve Bank "climate stress testing" the risk of flood-prone homeowners, farmers defaulting on loans

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Reserve Bank "climate stress testing" the risk of flood-prone homeowners, farmers defaulting on loans

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The Reserve Bank is ramping up its climate stress-testing, warning that a combination of worsening droughts, floods, export tariffs and changing appetites for food could see farmers and property owners defaulting on their loans. Along coasts and rivers, insurance companies could withdraw protection from flood-prone houses , leaving banks at higher risk from exposure to mortgages on un-insured properties. In farming: It is plausible... that agriculture could face drought, a consumer shift towards plant-based protein, intensified regulation [to cut greenhouse gases] and a carbon border adjustment mechanism in key export markets all at the same time, said the central banks latest report, entitled Climate Changed . These risks can affect the safety and soundness of the firms we regulate, the stability of the wider financial system and the macroeconomic outlook, it said. The central banks report said it was embarking on an 18-month programme to devise a full climate stress test for financial industries, which it aims to launch in 2023. It also published its own carbon footprint for its two offices and 470 staff, as well as the goods and services it buys: a tally of just over 10,000 tonnes of emissions for 2020-21. That was down 10 per cent on 2019-20, mainly because of staff doing less business travel, because of Covid-19. READ MORE: * Should we fear the rise of the woke central banker? * Climate change a risk to financial stability, Reserve Bank says * Companies will report climate risk, but they need more certainty from politicians * Plan to 'green' financial system could mean KiwiSaver funds must front up on carbon footprints Because the Reserve Bank is responsible for helping to secure a stable financial system, it is concerned about anything that could affect the bottom lines of the banks and insurers it regulates including climate change . Both climate impacts, and efforts to stop them by cutting emissions, pose risks to those companies. For example, people might switch to eating synthetic meat or plant-based protein, affecting livestock farmers, and their ability to pay their loans. Or high-emitting industries might find it hard to attract investment as big investors green their portfolios, the Reserve Bank report said. Carbon-intensive exports could also be hit with border taxes at the country of import. Companies and other entities might also risk liability from lawsuits by people seeking compensation for losses caused by climate change, the report noted. Meanwhile, previous research shows the effects of climate change have already cost New Zealand about $800 million in lost GDP from droughts in the past decade and could expose more than $18 billion worth of New Zealand buildings to flooding in the next few decades. On the flip side, longer growing seasons could help recoup financial losses from farming. These climate impacts can be difficult to accurately put a price on, because of the speed and uncertainty of change, the Reserve Bank report noted. But leaving them out of calculations can lead to high-risk behaviour. The transmission of climate risk to the financial system needs to be better understood. Many increasing risks are effectively baked in over the next few decades because of humanity's past pollution, the report noted because the climate will keep changing even with rapid emissions cuts. For general insurers this will mean more frequent extreme weather events leading to increasing claims and more large spikes in claims. Over time, the trend could mean some assets become uninsurable. For banks this will mean increased risks to the properties they rely on as collateral. There will also be an increased risk of default, for example by agricultural borrowers dealing with the impacts of increasingly extreme weather such as droughts, the Reserve Bank report said. On insurance: General insurers typically rely on years with benign weather conditions to offset elevated claim costs from years with more extreme events, without needing to make significant adjustments to premiums, it said. With climate change, extreme weather events are becoming more commonplace and the frequency of years with benign weather from an insurance perspective will be greatly reduced. The Reserve Bank also assessed the climate impact of the government bonds it invests in, which include New Zealand Government bonds as well as bonds backed by other governments. It found the carbon-intensity of its portfolio was higher than average for G7 country bonds, because our central bank holds more bonds from high-emitting countries (Australia and Canada for example) than it does from lower-emitting ones (such as the UK and Japan). New Zealands government bonds are also slightly higher in their emissions-intensity than the G7 average, said the report. The Intergovernmental Panel on Climate Change says carbon dioxide emissions need to fall rapidly, by about 45 per cent from 2010 levels by 2030, meaning big changes to the make-up of economies and investments. The latest Reserve Bank report highlights that slower Government action on climate change will increase the risks to financial stability, by creating a short, sharp correction later. The longer we delay, the greater the potential for a disruptive transition... Beginning now to get on the path to a low-emission, climate-resilient economy... will help reduce the risks to the stability of the financial system, it said. Already, Westpacs climate risk disclosure has showed that bank alone has billions of dollars worth of exposure to climate change risks mainly because of residential mortgages that are vulnerable to sea level rise.