Denmark’s central bank warned rising waters pose a threat to the financial system as property used as collateral against bank loans may be worthless in coming years, amid increasing damage by climate change to the country’s 5,000 mile-long coastline.
Flood risks already threaten 41 billion kroner ($6.7 billion) in loans, and the figure could rise to as high as 198 billion kroner by the end of this century, the central bank said in a report, part of a new series anticipating the effects of climate change. That’s about 7% of all real estate exposures.
Floods may pose “a risk for individual credit institutions as well as the financial system,” the central bank said.
The Copenhagen-based bank said that lenders should incorporate climate-related exposure in risk management for their real estate loans.
Geographical concentrations also should be addressed, as some lenders face greater threats due to the higher exposure in loan books to property likely to be affected by flooding.
Detailed climate and flooding data provided by the Technical University of Denmark made it possible for central bank researchers to pin down what areas of the country are particularly vulnerable.
Banks currently have about 2.8 trillion kroner in real estate exposures, the central bank said. While property owners will be the first hit by flooding, banks too will likely experience losses as the value of properties drop. The research doesn’t account for potential compensation from insurance.
Photograph: Residential and commercial properties stand on the bank of the canal in the Nyhavn district of central Copenhagen, Denmark, on Wednesday, Jan. 2, 2019. Photo credit: Luke MacGregor/Bloomberg.