The Reserve Bank’s Frog-Exaggerator

Dr Eric Crampton
Insights Newsletter
4 November, 2022

In a classic Simpsons episode, the gang went out looking for the Loch Ness Monster. Professor Frink turned on his scanning scope. He watched the gauge.

Then, with horror, he announced: “Oh, my great, good God. Gentlemen, your attention, please. I am detecting a gigantic amphibious life-form. It’s 80 meters long and it’s heading this way.”

A frog hopped out of the Loch and onto his shoe.

Then Professor Frink realised that he hadn’t been using his Monster-Ometer. He’d turned on the Frog-Exaggerator.

A Reserve Bank press release this week warned, “Climate change stress test highlights flooding risks”. The first paragraph cautioned that river and surface water flooding “may pose an even greater risk to bank residential mortgage portfolios than coastal flooding.”

Professor Frink was at least embarrassed about having used the wrong machine. He didn’t write press releases emphasising the large size of the frog that had jumped onto his shoe.

Because if you read through the report, it looks like RBNZ has been using its frog-exaggerator for climate risk to the financial system. Again.

The Bank assessed how many mortgaged properties might be affected by flooding by 2100, if sea levels rise by a metre, a 1-in-100-year event happens, and if banks do not change their lending practices.

Almost 4% of mortgaged properties will be in the flood-zone of a 1-in-100-year storm tide that happens on top of a one-metre sea level rise.

In Auckland, more than a quarter of mortgaged properties touch at least some small part of river flood zones.

Really, the numbers are a lot smaller than we might have expected.

But more importantly, and as the Bank’s report later points out, a heck of a lot can happen between now and 2100. Almost no loans are for more than 30 years and 80% of current mortgages in these flood-zones have low loan-to-value ratios. Defaults are unlikely.

There is substantial risk of sea level rise over the coming century, but banks aren’t stupid. Most mortgages turn over in about three years and banks will be less likely to provide mortgages for houses that have high risk of being underwater. In BusinessDesk, Jenny Ruth calls the Bank’s arguments ‘spurious’.

Climate change is hugely important. But it just isn’t a substantial prudential risk for the financial system.

There are far bigger financial risks out there. For example, a Reserve Bank that spends too much time playing with its frog-exaggerator when an inflation monster is running wild. 

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