As parts of Europe are still recovering from last summer’s devastating floods, the European Central Bank (ECB) is assessing how commercial lenders would react if flood-prone property were to suddenly lose nearly half of its value. .
Last year saw $323 billion in losses from climate-related disasters globally, making it the third costliest year on record, according to a new report from Aon, one of the largest brokers. insurance in the world. The biggest blow came from the July floods in Europe, which inflicted $46 billion in damage and left insurance industries in Germany, Belgium and Luxembourg reeling from record losses.
Looking to a future in which summer floods become more frequent and intense, the ECB assesses how banks would react to a scenario in which the value of the most flood-prone property fell by 45% in a single year, leaving Dutch banks and German women particularly exposed, Bloomberg reported. The central bank will release this and other stress test scenarios later this week.
The stress tests will look at how banks would react to changing market conditions in a warming climate, including rising carbon prices and more disastrous floods and wildfires. The results of this year’s stress tests will not result in new capital requirements, but banks will eventually be driven to hedge against escalating risks associated with climate change.
“As catastrophic events increase in severity, how we ultimately assess and prepare for these risks cannot depend on historical data alone,” said Eric Andersen, president of Aon. “We need to look to technologies like artificial intelligence and predictive models that are constantly learning and evolving to map the volatility of a changing climate.”
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