Flood risk and financial stability: Evidence from a stress test for the Netherlands

If climate change continues unabated, extreme weather events are expected to occur more frequently. Rising flood incidence will especially affect low-lying countries, both through property damage and macro-financial adversity. Using a stress test framework and geocoded data on real-estate exposures for Dutch banks, we study when floods would start impairing financial stability. We find that the banking sector is capitalised sufficiently to withstand floods in unprotected areas, where there is relatively little real estate. However, capital depletions would increase quickly in case more severe floods hit the densely-populated western part of the Netherlands. These findings have possible implications
for various policy areas, including macroprudential policy.

Keywords: financial stability, flood risk, real estate, stress test
JEL codes: G21, Q54, R30

Working Paper No. 730