Irish Central Bank Issues Note on Transition Risk in Mortgage Lending
The Central Bank of Ireland published a Financial Stability Note that focuses on the climate-related transition risk in mortgage lending. The note uses loan-level data from the New Mortgage Lending series of the central bank and proposes a new methodology to populate loan-level data with borrower energy and emissions estimates to facilitate the analysis of transition risks. From a policy perspective, the Note suggests that targeted transition supports for those households most at risk would help to reduce wider risks to economic and financial stability.
Using these emissions estimates, the authors consider the possible impact of a number of future medium and long run carbon price scenarios to household resilience. In the framework, the current carbon intensity of households is key to explaining vulnerability in the transition to net zero, with rural and, in particular, low-income households most at risk. The speed of adopting energy-saving technologies and behaviors are important determinants for mitigating these vulnerabilities. The authors note that the estimation framework, while providing a platform to analyze climate risk, does not replace the need to collect data from source.
The authors find that energy consumption and emissions are positively correlated with income, property size, the number of occupants and location (rural areas). Emissions among higher-income groups are over double those of lower-income groups. Furthermore, energy usage is 40% higher in rural areas, largely due to bigger properties and higher transport expenditure. The Note further finds that bank exposure to energy-intensive households is likely to be sizable—~60% of mortgaged households are in “high” or “very high” energy/emissions categories. In the long run (to 2050), however, household resilience will depend on income growth and the speed of household energy/emission mitigation, for example, through increasing energy efficiency levels and switching to low-emission fuels. The authors note that lower-income households are less likely to be in a position to invest in such technologies. The Note finds that, in a best-case scenario of 2% income growth and high energy/emissions mitigation, the average household energy-to-income ratio in 2050 would not increase. This emphasizes the link between national decarbonization targets and overall financial stability.
Keywords: Europe, Ireland, Banking, Financial Stability, Mortgage Lending, Energy, Climate Change Risk, ESG, Credit Risk, Central Bank Of Ireland
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Hasan leads Moody’s Analytics ESG methodology development. He is expert on carbon transition, nature related risks and is a guest lecturer at ESSEC Business school on sustainable finance.
Michael Denton, PhD, PE
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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