Monday, November 15, 2021

Fed courage.

From Federal Reserve Bank of New York, 

How Bad Are Weather Disasters for Banks?

Kristian S. Blickle, Sarah N. Hamerling, and Donald P. Morgan

Federal Reserve Bank of New York Staff Reports, no. 990 November 2021


Not very. We find that weather disasters over the last quarter century had insignificant or small effects on U.S. banks’ performance. This stability seems endogenous rather than a mere reflection of federal aid. Disasters increase loan demand, which offsets losses and actually boosts profits at larger banks. Local banks tend to avoid mortgage lending where floods are more common than official flood maps would predict, suggesting that local knowledge may also mitigate disaster impacts.

Key words: hurricanes, wildfires, floods, climate change, weather disasters, FEMA, banks, financial stability, local knowledge

In addition to the paper's good analysis, there is a useful literature review,

Our main findings are generally consistent with the few papers that study the bank stability effects of disaster. Looking across countries, Klomp (2014) finds that disasters do not effect default risk of banks in developed countries. Brei et al. (2019) find that hurricanes (the most destructive weather disaster) do not significantly weaken Caribbean banks. Koetter et al. (2019) finds increased lending and profits at German banks exposed to flooding along the Elbe River. The study closest to ours by Noth and Schuewer (2018) finds default risk increases at U.S. banks following disasters but the effects are small and short-lived. Barth et al. (2019) find higher profits and interest spreads at U.S. banks after disasters but did not look at bank risk. Based on four case studies of extreme disasters and small banks, FDIC (2005) concluded that ..."historically, natural disasters did not appear to have a significant negative I impact on bank performance." 

This is a courageous paper to write, and to write so clearly. The fantasy of "climate risks to the financial system" is passed around and around in order to justify using financial regulation to implement this Administration's climate policies, centering on defunding fossil fuel development and subsidizing deployment of particular technologies such as electric cars and windmills. Documenting that this particular emperor has no clothes takes great courage. 

As a small indicator of the forces at work, Treasury Secretary Janet Yellen offered an eloquent summary of a the "whole-of-government' effort to integrate climate into financial regulation

“FSOC is recognizing that climate change is an emerging and increasing threat to U.S. financial stability.  This report puts climate change squarely at the forefront of the agenda of its member agencies.."

News that climate change is not a threat to financial stability will not go down well. 

Governor Lael Brainard, currently a leading candidate for Fed Chair, is a strong proponent of "climate risks to the financial system." = Just read here speeches. Here, for example,  

Climate change is projected to have profound effects on the economy and the financial system, and it is already inflicting damage.

We can already see the growing costs associated with the increasing frequency and severity of climate-related events. 


It is increasingly clear that climate change could have important implications for the Federal Reserve ... Given the implications of climate change for both individual financial institutions and the financial sector as a whole...,

Climate change and the transition to a sustainable economy also pose risks to the stability of the broader financial system. ...

And a hint of the vast institutional commitment to these ideas 

To complement the work of the SCC, the Federal Reserve Board is establishing a Financial Stability Climate Committee (FSCC) to identify, assess, and address climate-related risks to financial stability. 

"We looked and there is nothing here" is not going to go down well. It's hard to publish papers and get jobs as climate and finance researchers these days if you come up with the "wrong" answers. 

A tiny complaint, 

the banking panic of 1907 was triggered by the earthquake and fire that ravaged San Francisco in 1906 (Odell and Weidenmier, 2005)

That struck me as I've written in the past that no financial crisis has ever been triggered by extreme weather or natural disasters, even in the era that natural disasters in fact caused much more damage as a fraction of income than they do today, and with much less well developed risk-sharing mechanisms. And 1907 was triggered by bank failures in NY. A.P Giannini was, famously, lending money in San Francisco the day after the earthquake.  I went back to Odell and Weidernmeier, and at best the SF earthquake was the butterfly whose wings set off 1907. It's a good paper, but I wouldn't cite it with such certainty. 


  1. You might be interested in this paper
    written in response to The Reserve Bank of New Zealand claims that climate change is a financial stability risk.

    1. This is a superb document. Thanks for passing it along.

    2. Thanks John
      Feel free to circulate it.


  2. now go look at the endless pot of money that is the US government, Federal Reserve ($9 trillion and counting) & world's central banks.

    They have corned the market on risk...everything is protected from fault, FEMA, student loans, wall street, GM, etc

    sadly today's child is born with $100k of debt....all so Goldman Sachs et al enjoy a RISK free environment with yearly massive bonuses!

  3. Hi John,
    do not you think that there is a difference between local environmental disasters and the supposedly global climate change? Banks and insurance companies can spread the risks of local events but perhaps they cannot when it is happening everywhere. Thanks!


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