The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price, and that of other ASX-listed banks, could come under fire due to the threat of climate change.
This insight comes amid comments made by the Reserve Bank of Australia's head of domestic markets, Jonathan Kearns, who recently spoke at a legal conference in Sydney, as originally reported by the Australian Financial Review.
Dr Kearns stated that climate change could make new home mortgages riskier for banks by extending their maturity dates while also devaluing the loan's collateral, increasing debt leverage:
New housing mortgages are typically for 25 years, while business loans are often for three to five years. Over these horizons, the effects of climate change are likely to be significant but are also very uncertain. But if climate change makes a home's location less desirable and significantly reduces its value, the borrower may have less opportunity to refinance or upgrade their property. The lender may then find that the loan on that property has a much longer realised maturity, and the collateral backing the loan has a lower value.
The National Recovery and Resilience Agency cites climate change as contributing to natural disasters in Australia It's said to affect the frequency and severity of bushfires, cyclones, floods, and other events.
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Climate change and the financial system
To mitigate the impacts of these disasters, Kearns stated that banks are seeking guidance from the Australian Prudential Regulation Authority (APRA) in the form of a climate vulnerability assessment (CVA), with results due some time this year:
Because of the substantial uncertainty they face, banks use scenario analysis to consider how their exposure to climate change depends on various parameters and behaviours. Individual bank results were provided to APRA in late May 2022, and APRA is looking to publish information on the outcomes and insights later this year after analysing these submissions. It is not only the banks that will learn from the CVA, but regulators will also learn how to better assess climate risk in the Australian financial system.
The CVA assessment and other developments in the banking industry could put climate change in renewed focus as it threatens to take a toll on the company's fundamentals. In August, the Commonwealth Bank of Australia (ASX: CBA) said that $31.2 billion worth of its loans were at risk from natural disasters caused by climate change.
ANZ share price snapshot
The ANZ share price is currently down 18% year to date. By comparison, the S&P/ASX 200 Index (ASX: XJO) is 7.8% lower over the same period.
Shares in the bank closed at $22.81 apiece on Wednesday, gaining 1.6%.
The bank's current market capitalisation is around $66 billion.
