Danish financial institutions are already exposed to 41 billion kroner (€4.05 billion) of climate risk, according to a new report from the country’s central bank. The Danmarks Nationalbank found the risk comes from collateralised real estate vulnerable to flooding.
The study shows this exposure could increase to 198 billion kroner (€19.6 billion) by the end of this century. This is equivalent to 7% of all existing exposures, with flooding risk concentrated in credit institutions in high-risk geographical areas.
Published as part of a series examining individual elements of climate change, the Nationalbanken report examines flooding risk at the municipality level based on detailed climate and flooding data from the Technical University of Denmark.
Flooding risk is concentrated in specific coastal locations, including the greater Copenhagen area, with a corresponding financial risk to credit institutions with a regional focus. This concentrates flooding risk in a handful of lenders, representing a potential threat to the Danish financial system.
Six of the nine most exposed credit institutions have more than half of their exposures located within the same geographical area around Copenhagen. This means “just one flooding event can have a severely adverse effect on these credit institutions”. The report warns that “a flooding event that hits several credit institutions simultaneously can pose a systemic risk”.
The study also finds that loans at risk of flooding already have a lower loan-to-value (LTV) ratio, with real estate loans in high-risk areas having an LTV of 46% compared to 52% for low-risk areas.
The Nationalbanken report emphasises that it focuses only on flooding risks to credit institutions from collateralised real estate exposure, and does not examine insurance industry risks or other transmission channels for systemic financial risk from flooding. The report also ignores threats to financial stability from market effects (such as falling real estate prices) and other transition risks.
With a 8,750 km coastline, Denmark is particularly at risk of coastal flooding associated with sea level rise and the increased frequency of storms. More than 40 major coastal flooding events occurred in Denmark between 1991 and 2017, with an increasing trend in the number of events caused by storm surges.
Global mean sea level has already risen by about 21–24cm since 1880. Future rises in sea level are expected to be between 30cm and 2.5m over the rest of this century, largely depending on the trajectory of global greenhouse gas emissions.
This page was last updated June 22, 2021
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