"I thought we still had more time"

What if the next financial crisis is climate-caused?

Remember March 2023? That's when Silicon Valley Bank and Signature Bank failed. Those banks weren't large: SVB had $209 billion in assets and Signature $110 billion. (Bank of America has $3.1 trillion and Citi has $2.4 trillion in assets. Those are big banks.) But they had both grown very quickly over a very short period of time, and they were exposed to concentrated risks: uninsured deposits (about 80 percent of deposits at both banks were uninsured), entanglement in the "digital assets" industry (crypto and blockchain, for Signature), and interest rate risks (SVB).

These banks didn't manage those risks well. Depositors, worried their money wasn't safe, tried to withdraw it all over two days. The following month, First Republic Bank failed. People worried that all regional banks were at risk—remember that? 

Then the dominos stopped falling. The government leapt into action, lending money through the Federal Reserve, providing essentially retroactive insurance from the Federal Deposit Insurance Corporation (FDIC) to those uninsured depositors, having the Treasury make soothing statements, and generally smoothing over the situation.

Maybe we moved on to other worries, having noticed that the failure of smaller banks can pose profound risks to the country's densely intertwined financial system. 

Well, look at today. Although the insurance industry and their captive modelers understand the risks of coastal real estate in the US (which is likely mispriced by about $200 billion), and are leaving markets where it doesn't make sense to operate, smaller (less than $10 billion in assets) and regional banks (with assets between $10 and $100 billion are inevitably exposed to concentrated physical climate risks.

These smaller banks tend to loan money in more geographically concentrated areas than larger banks, and to rely more heavily on real estate-related transactions than larger banks: even though smaller banks account for just 15 percent of the industry's total loans, those smaller banks make 30 percent of all commercial real estate loans and 36 percent of all small business loans in the nation, according to the FDIC. The former Signature Bank was a huge actor in NYC commercial real estate, for example. 

So as seas rise and storms intensify, these not-huge banks' customers will suffer and the banks will suffer in turn. Small businesses, flooded out (even temporarily), will be less "productive." Businesses will be disrupted. Supply chains will be mangled. Revenues will go down. Some may shut down altogether. These banks also invest heavily in municipal bonds that may be the subject of defaults. Real estate assets put up as collateral for bank loans may lose value or disappear into the waves.

Nearly two-thirds of US homeowners are paying a lender for a mortgage—usually a bank—and that bank in turn is probably counting on insurance that may disappear or be grotesquely oversubscribed. It's really the federal government that will then be on the hook, because Fannie Mae and Freddie Mac support about 70 percent of the mortgage market. 

From what I can tell, bank regulators are trying to get smaller banks to do more stress testing for physical climate risks and the smaller banks are resisting. The Independent Community Banks of America association says, for example, that its members will "resist efforts by lawmakers and regulators to impose or to incorporate as part of their supervision and examination...[c]ommunity bank stress testing or scenario analysis based on adverse climate change assumptions."  The whole idea of testing for climate-change risks has gotten twisted into an argument about wokeness. Which is bananas.

Even though there is tremendous resistance to admitting that coastal risks are high, we're highly capable of deferring or deflecting action by saying the models are uncertain, and there are very strong forces aligned to subsidize and keep in place the status quo, maybe having the financial system totter will adjust lawmakers’ perspectives.

Right now, coastal developers are driving up risks and thus essentially borrowing money from future taxpayers. Rather than change land use laws and practices, our public response seems to be to say, "We'll figure things out when it gets bad enough." We've noticed the insurers leaving. The banking industry may be just behind the insurance industry in sending the signal that it is now indeed bad enough.

We know from March 2023 that even a couple of bank failures can cause our entire financial system to shudder. Maybe we’ll get the message that land use statutes and traditions need to change.

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This week, the risk of rapid water shocks to the coastal US became undeniable. I've written about this before, and I'll keep writing about it. Even if we sharply reduce GHG emissions tomorrow, Western Antarctica will keep rapidly melting, according to a new study in Nature that is described here. “People who are alive today are going to see a significant increase in the rate of sea level rise in all the coastal cities around the world," Ted Scambos, a glaciologist at UC Boulder, told CNN. Along the East Coast of the US that rate will be 2-3X the global average.

Listen to the poignant words of Erick Katz, who lived alongside the North Carolina coast until his house was finally bought out: “We’ve been talking about climate change and rising sea levels forever. I always expected it would be something my kids’ kids would have to deal with,” he told the Washington Post. “I thought we had more time.”

I wouldn't bank on it.