Is Flood Risk Priced in Bank Returns?

Abstract:

I quantify the costs of flood disasters for banks and develop a novel measure of bank-level flood risk exposure using expected flood risk estimates and mortgage lending data. Banks with significant mortgage exposure in affected areas show reduced profits and capital ratios post-flood. In the cross-section of stocks, small banks with high flood risk exposure underperform by up to 2.6% annually, indicating that flood risk is not fully priced. This underperformance persists even after accounting for realized disaster impacts on returns and investors’ climate change concerns, highlighting regulatory concerns about banks’ physical risk from climate change.

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