Climate Change-Related Disasters ‘Not Very’ Impactful on Bank Financial Stability: New York Fed

People walk wearing masks outside the Federal Reserve Bank of New York in New York on March 18, 2020. (Lucas Jackson/Reuters)

A new study from the New York Federal Reserve examining the impact of climate change via extreme weather events on bank financial stability throws cold water on the heated rhetoric around climate change, finding that the threat to banks from natural disasters is trivial while suggesting that a bigger danger to financial institutions comes from policies meant to shield them from such risks.

The Fed report sought to gauge how banks fared against past disasters by examining FEMA-level disasters between 1995 and 2018 and county-level property damage estimates from SHELDUS (Spatial Hazard Events and Losses Database for the United States). The authors concluded the impact was insignificant.

“Not very,” the three authors of the study wrote, positing an answer to the question posed in the title of the report: “How Bad Are Weather Disasters for Banks?”

“We find that weather disasters over the last quarter century had insignificant or small effects on U.S. banks’ performance,” the authors wrote, adding that the stability seems more to do with the intrinsic resilience of financial institutions than any federal aid they may have received in response to extreme weather events.

Profit-Boosting Impact of Disasters

For bigger banks, it turns out that disasters increased loan demand and actually boosted profits, the study says.

“Losses at larger (multi-county) banks are barely affected and their income increases significantly with exposure,” the authors wrote.

Local banks, too, demonstrated resilience to extreme weather events, although the study found they did experience more negative stability impacts from extreme disasters.

“Local banks tend to avoid mortgage lending where floods are more common than official flood maps would predict, suggesting that local knowledge may also mitigate disaster impacts,” the authors wrote.

But even though local banks are more prone to suffering instability impacts from disasters, these were not found to have been significant enough to threaten bank solvency.

“In particular, loan losses and default risk at local banks do not increase significantly,” the authors wrote. “Charge-offs at multi-county banks increase but the impact is very small. Moreover, not all effects are bad; income of multi-county banks increase significantly with disaster exposure.”

Policy Risk

In fact, the bigger risk to banks comes from climate policy, not climate change-related extreme weather events, the study’s authors suggest.

“For policymakers, our findings suggest that potential transition risks from climate change warrant more attention than physical disaster risks,” they wrote.

Michael Shellenberger, author of the book, “Apocalypse Never: Why Environmental Alarmism Hurts Us All,” said in a series of tweets reacting to the Fed report that the findings are unlikely to be “the final word on the matter,” given the appetite on the part of the Biden administration to view climate change as an existential threat.

“Upon taking office, President Joe Biden warned government agencies that climate change disasters threatened retirement funds, home prices, and the very stability of the financial system,” Shellenberger wrote.

Michael Shellenberger pictured during the second 'V-Day' of conservative Flemish nationalist party N-VA to present their priorities regarding energy and ecology for the upcoming May elections, in Gent, on Feb. 23, 2019. (James Arthur Gekiere/AFP via Getty Images)

But while he says the Fed report “throws cold water on the over-heated rhetoric,” he pointed to a recent Treasury Department-led Financial Stability Oversight Council (FSOC) report, which advocates for dozens of new climate regulations to be imposed on the banking industry.

The FSOC report provides a roadmap for integrating climate risk management into the financial regulatory system, with recommendations including pushing for climate-related disclosures by firms, shoring up climate expertise at agencies, and developing tools to better model and forecast financial risks, such as scenario analysis.

“It’s a critical first step forward to the threat of addressing climate change, but will by no means be the end of this work,” Treasury Secretary Janet Yellen said of the report.

The FSOC report also backs a major regulatory initiative already underway at the Securities and Exchange Commission, which would establish standard climate disclosure requirements for public companies.

Shellenberger, an environmental activist for 30 years, used to be convinced that climate change was an existential threat to humanity but now believes climate alarmism is out of touch with science and reality. He argues it’s diverting attention away from serious environmental problems like overfishing, preventing desperately needed development in impoverished nations, and stifling debate about nuclear energy.

“Climate change is punishment for our sins—that’s the basic narrative pushed by climate activists and their banker sponsors. It has a supernatural element: the belief that natural disasters are getting worse, killing millions, and threatening the economy,” he said in a tweet. “In reality, disasters are killing fewer and costing less.”

“But the religion offers redemption: to avoid punishment we must align our behavior with the unseen order—one controlled by the U.N., bankers, and climate activists,” he added.