Floods threaten lives and property, but they also ripple through the financial system. Banks can face tighter credit flows, greater default risk, and a shift in overall financial stability when flood events spike. In Spain, more than 81,000 mortgaged homes lie in zones with elevated flood risk, creating a collateral backdrop that affects lenders if borrowers struggle to meet payments. The country’s housing market and banks alike feel the impact when flood exposure rises, not just in local communities but across the financial sector.
The first biennial report on climate change risks to the financial system, prepared by the Bank of Spain in collaboration with the CNMV and the General Directorate Insurance and the Macroprudential Authority Pension Funds Financial Stability Council, outlines how flood risk translates into potential instability. The data show that the number of mortgaged homes in high-risk flood areas is higher than previously thought, with certain regions reporting gaps due to missing data for areas such as the Basque Country and Navarra. Using cadastral references, researchers could geolocate about 60% of homes to flood-prone locations.
Auditors relied on the national mapping system for flood zones, developed by the Ministry of Ecological Transition. The map categorizes regions into four probabilities of flood occurrence: high probability (roughly every 10 years on average), often (about every 50 years), moderate to occasional (about every 100 years), and low or exceptional probability (around every 500 years).
2.7% of total
The study, the main results of which were reported by the press, shows that as of June 2022 researchers could locate the geographic position of roughly three million homes. About 1.3% (nearly 39,000) sit in areas that flood on average once every ten years. Another segment faces the flood risk on a 50-year cycle, while 42,000 homes (1.4%) fall into the highest risk category with a broader geographic footprint totaling over 81,000 homes or 2.7% of the sample. Regions with a 100- to 500-year flood probability account for about 150,000 homes (5%), though the immediate bank risk attributed to these areas is much lower due to the infrequency of events.
The appraisal value of homes located in flood-prone zones represents about 6.6% of the total assessed value for the three million properties regionally mapped. This indicates an underweighting of flood-prone properties in the overall sample, with 7.7% of the assessed homes concentrated in high-risk areas. Mortgages on flood-prone properties generally align with mortgage levels elsewhere, showing no systematic elevation in credit risk solely due to flood exposure. When the loan amount is weighed against the property value, the risk to lenders remains manageable relative to other factors, given that collateral value may erode during floods.
Expertise and insurance companies
The initial analysis reveals that the exposure ratio of the bank mortgage portfolio to flood risk did not show elevated credit valuations in high-risk zones. Yet the report cautions that the frequency and severity of flood events could change as climate conditions shift, possibly widening flood zones in the future. Ongoing monitoring is advised to capture any shifts in risk patterns as events become more frequent or intense.
Looking ahead, the Bank of Spain anticipates further examination of how real estate valuations incorporate flood risks and how sudden adjustments might affect appraisal values when floods occur. Insurance providers are expected to play a mitigating role, absorbing some potential damages and reducing the likelihood that warranties lose value in flood scenarios.