After APRA criticised banks for disparate approaches to climate change modelling, lenders are developing more granular approaches to protect loan security.
Banks are preparing to model the impact of climate change on their mortgage books at the level of individual blocks rather than postcodes. The strategy provides a more granular picture of flood and fire risk after the prudential regulator called for banks to find better quality data in its “climate vulnerability assessments” last year.
A house in Woodburn, in the NSW Northern Rivers region. Banks are considering how to model flood risk at the block rather than the postcode level.Banks are responding by developing data sources that drill down on risk to levels below a block of land, said Bain partner Katrina Cuthell, who is advising banks on incorporating climate stress testing into everyday risk assessment systems.
“We are seeing many banks globally integrate these capabilities into their risk, credit and strategic planning processes, so they become part of their underlying capabilities, rather than a one off regulatory stress test. Banks in Europe are further ahead on this as the regulatory environment there has been historically ahead of Australia. But banks in Australia are starting to take some steps.”
The grain and cattle sectors, both beef and dairy, will also be hard hit by rising temperatures, with loss rates expected to double by 2045 in most major geographical regions.
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