Rising floods threaten Danish financial system

Copenhagen: The Danish capital is one of the parts of the country at greatest risk from flooding. Image: By Marie-Lan Taÿ Pamart, via Wikimedia Commons

Stormier seas and more frequent floods can cause havoc anywhere. The Danish financial system is now growing apprehensive.

LONDON, 16 June, 2021 − Flooding caused by storm surges and general changes in climate give rise to misery around the world, destroying homes and livelihoods and forcing the migration of hundreds of thousands of people. The financial impact of floods can also impose severe economic strains, and not just in the developing world: the Danish financial system now fears growing losses to come.

Denmark is a relatively small country but has a long coastline, stretching for more than 8,000 kilometres.

As part of a series of reports on the impacts of climate change, Danmarks NationalBank, the country’s central bank, warns that billions of dollars have been loaned to householders and businesses located in coastal and other flood-prone areas.

Flood damage could make recouping many of these loans extremely difficult; credit institutions with substantial exposure to such loans could go out of business. The integrity of the financial system might be threatened.

“Climate change is leading to increased recurrence and severity of flooding from storm surges”

“Exposures of 41 billion krone (US$7billion) are currently located in areas already at risk of flooding”, says the central bank.

“This amount will increase to DKK198 billion (US$32 billion) over the next 50-80 years in the most extreme climate scenario…this implies that the risk could constitute a risk for individual credit institutions as well as the financial system.”

The central bank’s report says the occurrence of floods round the country is increasing, with more than 40 flooding events caused by storm surges happening in the 1991 to 2017 period.

“Climate change is leading to increased recurrence and severity of flooding from storm surges, and the effect from storm surges is further exacerbated by sea level rises,” says the report.

Losses passed on

Areas of the country most exposed to flooding include the area round Copenhagen, the capital, the west coast, and Jutland in the north.

Initially, says the bank, homeowners and businesses with premises located in flood-prone areas will bear the financial costs of flood damage.

“However, the loss can ultimately affect credit institutions…value depreciation has a direct effect on homeowners and can be transmitted to credit institutions if the real estate has been pledged as collateral for the loan.”

Central banks around the world are issuing increasingly strident warnings to banks and other credit institutions about the challenges posed by climate change.

Warned off

In many instances insurance companies and other financial institutions are being told to put aside a portion of their earnings in order to cope with the increased costs climate change will bring.

Investors are being warned that putting money into fossil fuel companies and related enterprises is an increasingly risky business.

Fossil fuel companies are also being told to revise their accounts to take into consideration so-called “stranded assets” – corporate fossil fuel holdings made essentially worthless due to the looming climate catastrophe and the growth of regulation forbidding their exploitation.

As a result, many billions of dollars have been written off the value of what were, till a few years ago, some of the world’s biggest and most financially powerful companies. Climate News Network