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Climate Change Stress Test Highlights Flooding Risks

Preliminary climate-related stress testing analysis carried out by the Reserve Bank of New Zealand – Te Pūtea Matua indicates that river and surface water flooding may pose an even greater risk to bank residential mortgage portfolios than coastal flooding.

The findings are being pre-released in an excerpt from our forthcoming November 2022 Financial Stability Report.

“Our long-term aim is to support banks to build their capability to identify climate risks and find solutions to the significant data and modelling challenges involved. In turn, this will lead to more proactive management of climate risk,” Deputy Governor Christian Hawkesby says.

“Although the exercise was far from exhaustive, it provided helpful estimates of exposures to selected climate hazards. We will use these findings to help build a picture of system-wide risk and to design further climate-related stress testing activities.”

In our coastal flooding exercise, we asked banks to measure the exposure in their mortgage portfolios to flood zones under varying levels of sea level rise ranging from 20 centimetres to 1 metre — a range consistent with modelling from 2040 to 2100 by the Intergovernmental Panel on Climate Change. The results found there were significant differences in the share of mortgage lending on properties that lie within a coastal flood zone across different regions.

In our assessment of banks’ exposure to river and surface water flood risk we focussed on the Auckland region. The results indicated that in a severe scenario, more than a quarter of the banks’ current Auckland mortgage lending was on land that could be impacted by flooding.

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“Although the exercise was limited to flooding risk for residential mortgages, it will help us explore financial system risks from climate change as we build and design further climate-related stress testing activities,” Mr Hawkesby says.

Further, detailed analysis of the flooding results will be published in a Reserve Bank Bulletin article next year.

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