Local banks and flood risk: The case of Germany

Abstract

This paper uses a simulation model to evaluate the effects of river flooding events occurring within Germany on regional banks. Under a 1.5 °C increase in temperature, the impact is overall rather small, even accounting for the devaluation of loans exposed to floods. Specifically, climate related risks would increase bank losses by 0.1% with large variability across NUTS2 regions. However, under a 3 °C increase, bank losses increases up to 1% of total assets. We show that the implementation of adaptation solutions would be successful in keeping risks at the current level. By supporting adaptation initiatives, such as investing in climate-resilient infrastructure or providing financial services to support sustainable practices, banks can play a crucial role in building the resilience of the financial sector and reducing the overall impact on the economy.

Keywords: Banking crisis; Dynamic balance sheet; Physical risk; River flood events.