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Discussion Paper
Flood Risk Outside Flood Zones — A Look at Mortgage Lending in Risky Areas
In support of the National Flood Insurance Program (NFIP), the Federal Emergency Management Agency (FEMA) creates flood maps that indicate areas with high flood risk, where mortgage applicants must buy flood insurance. The effects of flood insurance mandates were discussed in detail in a prior blog series. In 2021 alone, more than $200 billion worth of mortgages were originated in areas covered by a flood map. However, these maps are discrete, whereas the underlying flood risk may be continuous, and they are sometimes outdated. As a result, official flood maps may not fully capture the true ...
Newsletter
Assessing the Midwest flood
Journal Article
Rules vs. discretion: the wrong choice could open the floodgates
Anyone who sets any kind of policy can appreciate the dilemma that faces those trying to prevent construction in floodplains: Is it better to stick to the rules-no matter how harsh-or to exercise discretion under certain circumstances?
Discussion Paper
Comparing Physical Risk: The Fed’s Second District versus the Nation
In this post, we discuss the climate-related risks faced by the Federal Reserve’s Second District and compare these with risks faced by the nation as a whole. The comparison helps contextualize the risks while framing them in the broader context of a changing climate at the national level. We show that the continental Second District—an area consisting of New York State, the twelve northern-most counties of New Jersey, and Fairfield County in Connecticut—faces fewer and less severe climate-related physical risks than the nation as a whole. However, the areas that comprise the Second ...
Journal Article
The economics of natural disasters
Discussion Paper
How Do Banks Lend in Inaccurate Flood Zones in the Fed’s Second District?
In our previous post, we identified the degree to which flood maps in the Federal Reserve’s Second District are inaccurate. In this post, we use our data on the accuracy of flood maps to examine how banks lend in “inaccurately mapped” areas, again focusing on the Second District in particular. We find that banks are seemingly aware of poor-quality flood maps and are generally less likely to lend in such regions, thereby demonstrating a degree of flood risk management or risk aversion. This propensity to avoid lending in inaccurately mapped areas can be seen in jumbo as well as non-jumbo ...
Report
How Bad Are Weather Disasters for Banks?
Not very. We find even the most destructive weather disasters over the last quarter century had only modest effects on U.S. banks’ performance. This stability seems endogenous rather than a mere reflection of federal disaster aid, as disasters tend to increase loan demand which helps offset losses and boosts profits. Local banks avoid mortgage lending where floods are more common than official flood maps would predict, suggesting local knowledge may also mitigate disaster impacts. Our findings inform ongoing assessments of the physical risks to banks from climate change.