Yves here. Richard Murphy has issued a dire warming on the impact of climate-change-induced flooding on UK housing and hence the mortgages on those houses. I went to the Oxford environs about a decade ago and my host Richard Smith graciously drove me around. He pointed out the high water mark of recent floods and how the entire area was historically subject to frequent flooding. These low lying areas, and the UK has lots of them, will only become more vulnerable.
We are also including a comment on Murphy’s post on the failure to properly implement existing protective/mitigation measures.
By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Fund the Future.
I posted this video on YouTube this morning:
The transcript dealing with this pretty big, and vital claim is:
UK banks are going to go bust because of climate change. Now, that’s a big claim to make, but I think it’s right. And let me explain.
When you borrow money from a bank, at least when you borrow a lot of money from a bank, the bank will normally want what they call security from you. In other words, they want some form of guarantee that you can repay.
Well, you don’t wholly blame them, do you? But let’s explain the most common form of security that they ask for. It’s your house, or if you’re a business, it’s your business property. In fact, 85 per cent of all loans made by UK banks are for the purchase of houses or business properties, or are at the very least secured on the value of houses and properties.
So why are banks going to go bust because of climate change? Well, because as a very senior risk officer of a very large UK bank explained to me not so very long ago, the vast majority of the properties that they are using for the purposes of security could be underwater in the next 30 years.
They know, for example, that the Thames barrier is not going to protect London from flooding. It’s just not tall enough.
They also know that if you live in the area of the country where I do, which is in the Fens, just south of the Wash in Norfolk, there’s a real risk that you will be flooded at some time over the next 30 years. Well, unless you happen to live in the Isle of Ely, as I do, which is a hundred feet above sea level – in which case, you’ll just be back on an island again.
They know that means that Cambridge will be underwater.
It means that Bedford will be underwater.
No, not all the time. But enough of the time that those properties will not only be uninsurable, but they will also be subject to such frequent damage that their value will be impaired and they will be no use as security for repaying the loans that the banks have lent out. on the basis of those properties.
Now, if the banks know that, why are they still lending? Well, they all pretend that they’ll be able to shove their loan books – secured against the value of these properties which they know are going to flood, unless we take action to prevent it – onto some other bank in the next few years, and therefore they won’t be on their books when it comes to the glorious day when the waters have risen and these properties are underwater.
But that doesn’t work. They’re all making that assumption. And of course, if they all make that assumption, they won’t be able to pass on the loans to somebody else because that somebody else won’t take them because they’ll know that the property is at risk of flooding just as the ones already on their books are.
So we’re heading for a banking crisis unless we deal with the risk of flooding in the UK.
Oh, by the way, this is also true of much of the USA as well, and large parts of Europe, and other places. But, let’s just worry about the UK for now.
Unless we take action to control flooding in the UK, our banks will fail because the debts that are owing to them, secured on property, will not be worth the value that they have, because those properties cannot be sold. And, therefore, the banks will go bust. In which case, the most important thing we need to do to preserve UK banking from failing completely and utterly, in a way that will make 2008 and the Global Financial Crisis look a mere picnic, is to build flood defences.
But nobody’s talking about doing it. And that is an act of gross irresponsibility. Not just by our government, but by the banks who are not demanding it, because they know they need it, just as much as you and I do, because it’s our houses that could be flooded.
Richard Murphy’s reader tony added:
I wouldn’t use insurance companies as a goto for advice or analysis on applied hydrology.
It is perfectly possible for 100 year floods to occur in consecutive years anyway.
The periodicity of flooding is changing quite rapidly, as the frequency of high precipitation events of short duration increases, and river regime is thus altered, as is flood risk.
In England the EA [Environment Authority] has seen cuts of 70% under austerity.
Apart from devastating its regulatory functions it has also hollowed out the ability of this dedicated government agency to monitor and plan for the impacts of climate change, managing floods being just one. Recovery from this low base will take some time.
Meanwhile, almost 25% of existing flood management infrastructure is below acceptable maintenance standards.
The absence of an integrated upper catchment management programme on English and Welsh river basins, aiming to slow flow peaks, is a national disgrace, as the prescriptions are known and relatively cheap to implement, with rewooding and re-establishing sphagnum bog being the most obvious. But the ownership pattern of upland estates militates against the Tories doing anything much about that, and the SNP have fudged the same issue here.
Of course the costs of climate change – both insurance and equity losses for banks and insurance companies will be socialised, just as they were in the GFC.
Ignoring the externalities in their business models is typical of these financial institutions.
Even when I studied Applied Hydrology in the 70s there were ‘Fight Rising Damp” stickers in 4th floor windows of medium rise blocks at Thamesmead, and Harlow had no proper flood drainage system. Yet it seems little has improved since then with short termism dominating, and the sectional interests in satisfying the property developer caucus in the Tory party prevailing.
The Thames Barrier is already operating well beyond its expected operational frequency at 50 times in 2014. The barrier was closed four times in the 1980s, 35 times in the 1990s, 75 times in the 2000s and 74 times in the 2010s.
The continuation of flood plain building, especially in the south, and the short termism of Reeves wishing to reduce planning controls for new builds under a potential Labour government is a particular triumph of stupidity. SNAFU