Transition Risks and Opportunities in Residential Mortgages

Discussion Papers 1910, 24 S.

Franziska Schütze

2020

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Abstract

A range of studies has analysed how climate-related risks can impact financial markets, focusing on equity and corporate bond holdings. This article takes a closer look at transition risks and opportunities in residential mortgages. Mortgage loans are important from a financial perspective due to their large share in banks’ assets and their long credit lifetime, and from a climate perspective due to their large share in fossil fuel consumption. The analysis combines data on the energy-performance of buildings with financial data on mortgages for Germany and identifies two risk drivers – a carbon price and a performance standard. The scenario analysis shows that expected credit loss can be substantially higher for a “brown” portfolio compared to a “green” portfolio. Taking climate policy into account in risk management and strategy can reduce the transition risk and open up new lending opportunities. Financial regulation can promote such behaviour.

Franziska Schütze

Research Associate in the Climate Policy Department



JEL-Classification: G21;Q48;Q56;Q58;R38
Keywords: Mortgages, residential buildings, carbon risks, transition risks, valuation, climate policy scenarios, policy and regulation