Floods impair Japanese banks, collateral value key channel
A Bank of Japan working paper finds that flood disasters impair Japanese banks' asset quality and profitability, though the overall impact has been limited. The study identifies the depreciation of real estate collateral as a crucial transmission channel for climate-related physical risks.
Limited impact, expanded credit
The paper, using granular, municipality-level data from Japan, shows that flood exposure leads to higher non-performing loan (NPL) ratios, increased credit cost ratios, and reduced returns on assets (ROA).
However, the estimated magnitudes of these impairments are economically small relative to average levels, suggesting a quantitatively limited impact thus far.
Simultaneously, banks tend to expand credit supply in affected regions following floods, possibly reflecting heightened demand for reconstruction and liquidity from firms and households.
This dual response highlights the complex interplay of factors post-disaster.
Collateral value: A critical channel
The study highlights heterogeneous bank responses.
Banks exposed to regions with significant post-flood land price declines experience larger financial performance drops and a more constrained credit expansion.
These effects are amplified for institutions with substantial real estate-secured lending.
This emphasizes that collateral value depreciation is a key transmission channel for climate-related physical risks to the banking sector, extending beyond direct borrower damage.
More than just a drop in the bucket
Despite the limited average impact, the study's identification of the collateral channel is highly relevant.
It offers crucial insights for risk management by pinpointing a specific transmission mechanism beyond aggregate effects.
For policymakers, this underscores the need to integrate real estate market dynamics into climate-related financial stability assessments.