Futureproofing APAC Banks & Savings

Futureproofing APAC Banks & Savings

By Dharisha Mirando, Debra Tan 23 November, 2022

Find out which 17 major APAC banks are on track of sinking loan books totaling US$7.9trn.

CWR’s new report “Futureproofing APAC Banks & Savings: Stress test right today, avoid hard landing from rising seas”, aims to help the financial sector manage imminent and “virtually certain” chronic risks from rising seas. 17 major banks across developed APAC from Australia, Hong Kong, Japan, Singapore and South Korea with loan books totalling US$7.9trn were analysed to reveal “triple whammy” concentrated risks from sea level rise (SLR). With around US$5trn or almost two-thirds of loan books exposed to escalating SLR risks, the report cautions APAC banks and central banks/regulators to stress test right today to stay afloat tomorrow.

Rising seas could sink banks and over 115 central banks and regulators around the world, under the auspices of the NGFS, have recognised that physical climate risks can trigger systemic shocks that lead to global financial collapse. The report highlights that as SLR’s sector-agnostic and geo-locational nature can over-ride traditional risk spread methods, banks must pay attention – the domestic skew of loan/mortgage books and the concentration in multiple vulnerable sectors amplifies risk clustering. Plus, the coastal nature of APAC means that regional diversification offers little SLR protection.

Across the analysed export hubs of Asia, global trade and supply chains will be disrupted as sector spread offers banks no shelter from rising seas. The financial impact will be significant: CWR’s new report also found that 62% of loan books of the 17 APAC banks are concentrated in sectors vulnerable to coastal threats: real estate (US$3trn; 39%), wholesale & retail trade (US$1trn; 13%), and manufacturing & industry (US$0.7trn; 10%).

Escalating climate risks = finance must wake up, especially in APAC

Globally, the region is the most vulnerable with over 200 million people at risk from just 1m of SLR. Worse still, future projections have shifted: previously, ~1m was considered the high-end worst-case scenario SLR by 2100, but now… the global scientific consensus under the IPCC is warning policy makers that 2-3m of SLR “cannot be ruled out” by 2100; and 5m by 2150.

In APAC, 200mn people will be at risk from just 1m of sea level rise…

The inclusion of these multi-metre levels indicates the importance of using these levels for “low-regret” adaptation planning as they may well be our reality if emissions and global warming continue. Sadly, according to the WMO, there’s now a 50:50 chance that global temperatures will breach 1.5°C by 2026 instead of the Paris Agreement target date of 2100. Overshooting 1.5°C some 70 years earlier will likely trigger tipping points that could result in rapid SLR by ~2060.

…but now the IPCC warns by 2100, 2-3m “cannot be ruled out”

The world has already reached 1.2°C today and the UN now finds that there is “no credible pathway to 1.5°C in place.” So clearly, as we are playing catch up to impacts, adaptation must be a top priority.

Banks must stress test right – without “seeing” the extent of these risks, they cannot be managed

Most NGFS members cannot see the real risks as their stress tests must improve, so the “triple whammy” concentrated loan book risks is being ignored…

The NGFS has thus urged banks/central banks to perform stress tests under the worst-case scenario. “Seeing” the future risk landscape will help steer banks away from a hard landing and systems collapse. Yet, most central banks/regulators are not prescribing banks to use the multi-metre SLR levels to stress test loan books leading them to underestimate the risk. Indeed, flood maps in CWR’s reports show that impacts between the “worst-case” 1m and “low-regret” levels of 2-3m of SLR are vastly different so banks cannot afford to get this wrong.

On top of this, the new report highlighted that banks are using the wrong timeline, with most NGFS members running stress tests for a 30 year timeline or less whereas SLR only manifests in a rapid manner after 2050. As a result, most banks remain blind to the “triple whammy” concentrated loan book risks highlighted in the report.

…yet the HKMA reveals that 0.55m of SLR by 2050 will put HK$1trn (US$128bn)/32% of property loan books of 27 HK banks at risk

Even at much lower levels of SLR, the consequences for finance are severe. For example, the Hong Kong Monetary Authority (HKMA) pilot climate stress test in 2021 revealed that around HK$1trn (US$128bn) or 32% of property loan books of the 27 Hong Kong banks analysed would be at risk from around 0.55m of SLR by 2050. The HKMA warned that devaluation from physical damages could be more than 50% for some properties in vulnerable areas. These numbers are worryingly high, yet banks could face more stress as seas are rising faster than we’d originally thought, outpacing most governments’ adaptation efforts so far.

Given that traditional methods of spreading risks won’t work for SLR, government action on transformative adaptation can help bank loan books be resilient. Yet this is also not being assessed and governments are not being engaged to draw up attack/defend/retreat adaptation plans.

Government adaptation action is important, but it varies…

Hong Kong and Singapore are island city financial hubs but have very different adaptation strategies. Singapore is adopting a “low-regret” approach: adapting for 2-3m of SLR by 2100 and is raising critical infrastructure to 5m+ above mean sea levels. In comparison, Hong Kong lags, adapting to a 1.5°-2°C future of at most ~0.5m of SLR by 2100.

24x more residential, commercial & industrial bldgs at risk in HK by 2100 if the gov’t adapts for wrong levels

The report’s deep dive case study on Hong Kong clearly shows that adapting to only 0.5m by 2100 instead of 2-3m as warned by the IPCC will put 24x more residential, commercial & industrial buildings at risk. This huge adaptation gap brings high exposure and could trigger systems collapse.

All paths to financial resilience starts with stress testing right today

Banks and governments must align their adaptation strategies, which can be done if they start stress testing right. The new report shows that their mismatched strategies fall into four broad pathways with different outcomes for the financial system. CWR hopes that the analyses in the report will help central banks steer away from a “Double Blind Maximum Risk” path toward “Transformative Adaptation”, the path that provides banks with the highest chance of staying afloat despite rising seas.

All paths to financial resilience starts with stress testing right today…

There is no running away from SLR risks; even if we manage to cut to zero emissions today, seas will continue to rise. Moreover, escalating risks and lagging adaptation mean that banks could be left carrying the risk, especially as the threat of “no insurance” also looms with compounding climate events; all the more reason to stress test right today. To facilitate this, the report includes a “3-Step Guide to Stress Test Right for SLR Risks” and an “8-Step Checklist to Futureproof Banks from SLR Risks”. Also provided is a “5 must-do checklist” for central banks & regulators to avoid systemic shocks triggered by SLR.

…Banks then have impetus to
…1) support proactive gov’ts to fund transformative adaptation; 2)engage laggard gov’ts; & 3) re-think their own carbon intensive loan book spread

CWR hopes these will help banks “see” the real risks, for when they do, they will understand why they need to act to 1) support proactive governments with funding for their transformative adaptation plans; 2) engage laggard governments to better their adaptation plans and avoid maladaptation; and 3) re-think their own carbon intensive loan book spread. Without stress testing right, banks will not have the impetus to change their behaviour. Right now, 9 out of the 17 banks analysed in the report rank within the top 60 most polluting banks globally; together these 9 APAC banks have provided US$560bn in fossil fuel financing since the Paris Agreement.

As the individual factsheets for the five countries/territories in the report show, each location faces unique risks be it physical or related to government action/inaction. Thus, there will be no one-size fits all solution. The road towards “Transformative Adaptation” is long – for both banks and governments – but it is a journey that must start immediately as SLR is here to stay.

Hopefully, the banking sector and regulators are listening. Otherwise, we are all in for a hard landing from chronic risks stemming from rising seas.

For more information on how rising seas will affect the 17 APAC banks from Commonwealth Bank of Australia and Mitsubishi UFJ Financial Group to HSBC, OCBC and KB Financial Group see the full report here.

Further Reading

• Code Red: 8 things you need to know about water in IPCC AR6 IPCC AR6 is a code red for water too! CWR’s Tan shares 8 things you may have missed on water and urges to delay no more
• The CWR Survival Guides to Avoiding Atlantis – Sea levels can be 3m by 2100, putting urban real estate equivalent to 22 Singapores underwater in just 20 APAC capitals & cities. With US$5.7trn of annual GDP at stake, get on top of the new risk landscape to survive
• Surviving Rising Seas – 20 APAC Cities: Who’s ahead & Who’s Behind? – The homes of 28mn to 100mn+ residents could be submerged in just 20 APAC cities. Which cities are more prepared? We walk you through the Top 5 Most Proactive & the Bottom 5 Laggards in our CWR APACCT 20 Index
• CWR APACCT 20 Index – Finance Sector Input On Methodology – Coastal threat assessment can be complex & daunting, so we did the heavy lifting by creating the index. But we did not do this alone – 100+ finance experts helped. See who they were & how feedback shaped the index
• Sovereigns At Risk: Lots Of Capital In Vulnerable Spots – Clustered nature of rising coastal threats plus lax govt action put APAC sovereigns at risk. CWR’s analysis of GDP, trade, markets & bank loans reveal intense concentration of risks. As no-sense strategies pervade, see who’s in CWR’s watchlist
• Dear John Lee, Heed President Xi’s “4 Hopes” & Futureproof HK – Rising seas could sink HK. CWR shows the new HK government how President Xi’s 4 proposals made during the 25th Anniversary can guide the way to adapt & futureproof HK so that it will “rise and shine brighter than ever”

More on latest 

• COP 27: Irrational Exuberance & 3 Signs of Imminent Crash – CWR’s Tan calls out who’s walking the talk at COP27 & mulls over 3 signs of frothiness that disguise the true extent of physical climate risks
• Hong Kong: How to avoid a “Double Blind Max Risk” path – Without revised adaptation plans 43,000 more residential, commercial & industrial buildings will be at risk from rising seas. CWR’s Mirando deep dives
• Who Will Pay For New Zealand’s Most Vulnerable Coastal Properties? – Sobering data on sea level rise shows water is now lapping close to a lot of New Zealand’s front doors but who will pay when it causes flooding? Not insurers. Logan, Lecturer of Civil Systems Engineering from UoC, expands
• Climate Action 100+ Updated Progress Report – Climate Action 100+ has developed an updated version of the Investor Guide for Engaging in Asia. AIGCC’s engagement manager, Hui shares key highlights
• COP27 – An Emporium of Mostly False Hope: 5 Key Takeaways – Get on top of what happened at COP27 in Egypt with CWR’s McGregor, from a historic loss & damage fund to still no holistic action on adaptation & water and from a fizzle on phasing out fossil fuels to net zero greenwashing