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2022 Flood risk assessment for residential mortgages

This Bulletin article looks at risks to residential mortgages caused by floods and climate change in Aotearoa New Zealand.

Rebecca Newman, Jonathon Adams-Kane, Ken Nicholls


The financial system is exposed to a range of risks from climate change. Financial institutions have been making progress towards identifying and understanding these risks over the last few years.

To build on industry efforts, last year we undertook risk assessments of the largest banks in Aotearoa New Zealand as part of our stress testing programme, covering banks’ residential mortgage and agricultural exposures. The main purpose of these exercises is to support banks to build their capability to identify climate-related risks and find solutions to the significant data and modelling challenges involved. In turn, this will lead to more proactive management of climate risk.

We published an early excerpt of the results from the residential mortgage risk assessment in the November 2022 Financial Stability Report that focussed on banks’ residential mortgage exposures that are at risk of flood damage.

This article provides the financial effects of flood risk on banks’ residential mortgage loan loss provisioning and total capital from the exercise. It also highlights insights from the associated qualitative information provided by banks that will help inform risk management and mitigation.

The purpose of publishing these findings is to support those who are currently working to better understand, manage and mitigate these risks, including financial institutions that did not participate in the exercise, as well as for general interest.

This exercise was conducted before the recent flood events across the North Island. Notably, flooding in the upper North Island, including Auckland, from record rainfall in late January 2023 and Cyclone Gabrielle causing significant flood events across much of the North Island in mid-February 2023.

These events had significant impacts on people’s lives, animals and property. It is important to note that this exercise does not model the impact of a discrete flood event such as these. Rather, it models the financial risk associated with increasing frequency and severity of flood events, through the channels of declining insurability and prices of at-risk properties.

However, these 2 devastating events do emphasise the importance of conducting this type of exercise. In addition, they will inform future flood mapping, and will likely bear on the frequency and severity of extreme weather events that financial institutions consider in their ongoing climate work.

Who took part in the risk assessment

The participating banks were ANZ Bank New Zealand, ASB Bank, Bank of New Zealand, Kiwibank, and Westpac New Zealand, which collectively account for nearly 95% of residential mortgages in Aotearoa New Zealand and over 90% of total banking system assets.

How the risk assessment works

In the risk assessment we asked banks to identify and assess changes in loan loss provisions and risk weighted assets from declines in insurability and residential property prices. The banks made these assessments based on hypothetical declines in at-risk property prices of different severities, each of which we refer to as a ‘sensitivity’.

Banks identified the impact separately for:

  • coastal flooding risk from sea level rise nationwide (and for the major regions), and
  • rainfall flooding risk in Auckland, with rising severity of extreme rainfall events.

Key findings

  • There are outstanding data gaps for rainfall flood risk and portfolio location data.
  • Banks indicated that there is active planning and procurement of better climate data across the industry. This will improve risk management capability, including climate stress testing.
  • There is a relatively small proportion of banks’ value of residential mortgages exposed to significant sea level rise and this is reflected in the size of provisions. However, there are potential areas of geographic concentration risk.
  • Nearly a quarter of banks’ residential mortgage exposures in Auckland are ‘at-risk’ to a 1-in-100-year rainfall flood event. Aggregate residential mortgage provisions rise significantly from current levels (from $0.4 billion in March 2022 to $1.3 billion for the most severe house price fall sensitivity) despite only half of the national mortgages being considered (mortgage loans in Auckland make up half of the national total).
  • Overall, banks’ capital ratios are resilient to the most severe sensitivities in the exercise when each shock is considered in isolation, with the aggregate capital ratio falling by up to 41 basis points. Results varied across banks, highlighting the exploratory nature of the exercise.
  • The sensitivities only considered property price changes. However, in our regular stress testing increases in unemployment rates are a major driver of bank losses and this exercise did not consider how the results would differ if flooding risks manifested against a backdrop of an economic downturn. Also, the results are sensitive to the start point of March 2022. Since then, house prices have fallen and mortgage rates have risen, making customers more vulnerable to the shocks considered in this exercise if we were to re-run it today.

Sensitivities allow us to focus on specific risks and parts of banks’ loan portfolios, and do not consider the effects of climate-related risk across banks’ full balance sheet. We will explore this in our 2023 Climate Stress Test and are using these sensitivities to guide our scenario design.