Conor here: Richard Murphy has in the past detailed the threat posed by climate-change-induced flooding on UK housing and the mortgages on those houses. Here he provides more of a global take, as well as updating the situation in the UK where wildfires are becoming increasingly common. Murphy offers some ways to fix this, although it’s hard to see a political path to these solutions on the horizon, and one can imagine that in the mind of the bankers they already believe they have a “resilient” system in place: bailouts.
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.
A massive banking collapse is coming — and the cause isn’t speculation this time. It’s climate change.
Uninsurable homes mean worthless mortgages, and worthless mortgages mean broken banks. Unless governments act now with public banking and sustainable cost accounting, society itself is at risk.
This is the transcript:
Like it or not, there is a massive banking collapse ahead of us unless urgent action is taken.
What’s the reason? Climate change is the reason.
There is no way around a banking collapse worldwide unless we begin to take climate change seriously, very soon.
Why? Because banks lend on the basis of security that they demand, which is charged on properties. And vast numbers of properties are not going to be suitable for the purposes of providing that security sometime very soon in the future, because they’re going to become uninsurable. And as a consequence, banking is going to collapse.
Let’s just explain this.
Banks don’t take risks. I know they like to pretend they do in their advertising. They try to pretend they’re entrepreneurs, and they’re the friends of business, and they’ll go out of their way to help you to meet whatever demand you might have. But the truth is, banks hate risk. So when they lend, they try to lend with what is called security. And that means that they take a mortgage over a property to guarantee that the loan that they’ve made to you is going to be repaid by them having the legal right to claim ownership of a property that is currently yours, and to then sell it if, for any reason, you default on payment to them. That’s how they lend.
You might call a mortgage a loan. But as far as the bank is concerned, it’s a legal charge over your home, which means that they can sell that home if you don’t keep up with the repayments. And it’s this structure, lending on security backed up by mortgages, that makes the banking system around the world work.
And that’s not just for homeowners either. It’s also for businesses. They, in the vast majority of cases, are lent to by banks on the basis that there is an asset that the bank can claim, whether that be property in most cases – occasionally something else – or the personal guarantee of the owner of a business, very often also backed up by a mortgage on their home.
So this is how banking is. Let’s not pretend otherwise. Over 85% of all loans in banking in the UK are backed up by a mortgage.
How does the role of insurance come into this then? Well, in theory, of course, you don’t need to insure a property, which is going to be used for security. Except, well, the bank insists that you do because it wants it to be there, of course. Because if it isn’t there for sale in a condition that is saleable, they’ve got no guarantee that they’ll be able to recover their money if you don’t pay them.
In other words, insurance is critical to reducing the bank’s risk once more. And they therefore insist that you will insure a property if you borrow on the security of the property in question. You will be familiar with this if you have a mortgage. The bank will require evidence that you have the property insured. Very often, they’ll insist you buy their insurance to prove that’s the case.
But the point is that all over the world, more and more properties are becoming uninsurable. We’ve seen this because of flood. Because of fire. Because of earthquake. Because of excessive heating, and because of drought. All of those are creating massive risks for the insurability of properties. And without insurance property is worthless for banking purposes.
And it’s climate change that is in every one of those cases, making insurance impossible in areas where it used to be easy to obtain.
Just think about it. Fire in Los Angeles has made buying new homes in that city with a mortgage virtually impossible.
Sydney in Australia is seeing an increased number of wildfires, as are other cities in that continent.
Southern Europe, Greece, France, Spain are all seeing fires breaking out all over the place, and they are threatening the security of properties and so of insurability.
Flooding is becoming more commonplace, including in the UK, and areas that were previously unknown for flood risk are now facing real problems. In particular, central London has a massive flood risk issue if the Thames barrier is not enlarged, and very soon. And it will take a very long time for any such enlargement to take place because there is now a very serious risk that it could be overwhelmed by floodwater sometime soon.
That would wipe out Docklands. It would wipe out the centre of London. It would wipe out, according to bankers I’ve spoken to, the vast majority of the security available to them for the commercial property lending that they make.
And we’re even seeing this problem in places we would never have imagined before in the UK.
There’ve been wildfires in Scotland.
There’s been a wildfire in North Yorkshire this summer.
And that’s putting real people’s homes at risk of being uninsurable for a new threat.
We’ve already had flood, and many people in areas that you wouldn’t imagine – the Trent Valley, for example; the Severn Valley, for example – have faced this problem. But now we have fire risk too, and so far the government hasn’t reacted, although it has on flood risk.
We then have to look at the new issue. And that’s heat and drought, and the problems are just escalating.
The issue is uninsurable properties in ever larger numbers will mean fewer and fewer mortgages being available in the future.
But it also means that existing loans will become unserviceable in effect, because there won’t be any insurance on them, and the risk in bank balance sheets will go up.
And then the problem is that when bankers realise that every bank’s balance sheet has vast numbers of assets on it, which may be of no value at all, they all stop lending to each other.
That is exactly what happened in 2008. In 2008 in the USA. Banks stopped lending to each other because they had no idea what the real value of the mortgages on other banks’ balance sheets was, and therefore, they stopped inter-bank lending.
The system ground to a halt. It followed here almost immediately, and we have, as I’ve already noted, got this problem in the UK. But it’s in Germany. It’s in France. It’s in Greece. It’s in Australia. It’s in all sorts of countries around the world.
The failure we face is not particular or individual to any one area or to any one bank.
The failure that we face is systemic.
And bankers, I know from conversations I’ve had with some of them, have been suggesting, “Don’t worry. We’ll be able to dump all our risky properties onto somebody else well before the crisis hits because there are some stupid bankers out there who’ll take anything.”
But that’s just naive. It’s even stupid. The fact is that this risk of insolvency will hit simultaneously. Everybody will suddenly realise, and there will be some trigger event. The fire in Los Angeles hasn’t been it so far, but it’s the warning sign. It’s the John the Baptist, to the coming of Christ, if you like – a bit of this patched metaphor, but one that works in this case – that says this is real and it’s going to happen.
And when banks collapse, what we get is a liquidity collapse. In other words, there’s no money moving in the marketplace.
And when payment systems collapse as a consequence, and they could, then supply chains fail.
And when supply chains fail, there will be no money to pay your supermarket. And you have, in all likelihood, got no more than nine meals in your whole house available to be cooked now.
You will be in crisis when this happens. Without banks, daily life will grind to a halt. No payments, no mortgages, no credit, no food supply, everything at risk.
No reward for work because somebody won’t be able to pay you.
This is how close to the wind we are already sailing, when we know that the entire underpinning of the balance sheets of every bank on which we are dependent to keep our payment system working is at risk.
Society has put itself in jeopardy, and at the moment, everybody is pretending with their heads in the sand – which might just be another of these climate risks – that everything will work out all right.
I promise you it isn’t going to. There is no way on earth that banks are going to be able to pass the parcel.
The central bankers are still doing that. They’re pretending that this risk doesn’t exist when they’re undertaking their risk analysis of these entities. But the fact is, the problem is growing exponentially. All over the world, it’s growing exponentially, which means it’s getting faster and faster in other words.
So, doing the type of risk analysis the banks are doing, which by and large looks backwards and by and large looks at past risk, as an indicator of future risk, is absurd. It’s just getting worse. Denial is not a strategy. It’s negligence. Climate risk cannot be ignored in banking.
So what must be done? We must recognise that uninsurability is now a core systemic risk in banking. And it’s ceased to be peripheral. It’s now at the forefront of everyone’s concern. We must work out who is most at risk, and for that purpose, I suggest that we use sustainable cost accounting, my method of accounting for companies at risk of the impact of climate change, and how we appraise the consequences.
We have to plan for alternative forms of banking before the current system collapses at the same time, because governments must be ready to replace failed banks. If they haven’t got that contingency in place, we’re in deep trouble.
And for that reason, we have to create public banking for public need and not private profit.
I said this very loudly and clearly in 2008. I said at that time that we had made a massive error of judgment by allowing banks’ payment systems on which we all rely and which are therefore core state infrastructure on which we are utterly dependent to be in private hands, when without them, the state would fail to function.
But nothing has been done since 2008 to put matters right.
We cannot survive climate change unless we change our banking system, is my point.
We need to change our models of lending.
We need to change our models of insurance.
We need to recognise that the current system is broken.
And we need to build resilient financial systems now with public backing to ensure that society itself will not collapse when our banks do.
But unless we take action, that is an almost certain outcome because they cannot survive in a world where properties are uninsurable, and more and more of them are moving into that category.
I’m not sure it’s yet time to panic, as the author seems to be- quite in a froth, actually. Although if I lived in the UK in its current state of governance, I might be looking for the exits also.
If the Gulf Stream no longer warms northwestern Europe, as is likely over the next few centuries, the climate of the uk will revert to something like that of Labrador. Public banking won’t help that situation. And the likelihood of the Bank of England ever permitting public banking is negative infinity.
I remember a few news articles from 2001 and 2002, which provided a contrast between Blair and Bush.
Blair: “my god, we don’t know where the tipping point in climate is? We need to act now!”
Bush: “we don’t know where the tipping point is? Well don’t worry then!”
I paraphrase and kid a bit but that was what they both expressed at the time. No one did anything regardless of what was said. Just a memory that comes up every time I hear some one suggest not panicking.
In the FT this morning —
The warped economics of insuring climate destruction:
Industry is exposing itself to steepening losses on natural catastrophe cover
https://www.ft.com/content/dd8532b0-e65c-49f0-9de3-2d4f8abebee9
https://archive.ph/Sd8EF
From April —
German insurer Allianz halves emissions from corporate portfolio
https://www.ipe.com/news/allianz-halves-emissions-from-corporate-portfolio/10129890.article
Why climate action remains essential
https://www.allianz.com/en/mediacenter/news/interviews/250207-beyond-policies-why-climate-action-remains-essential.html
I had a conversation with a venture capitalist last month, who brought this up himself because he believes it.
So plenty of people in the upper echelons recognize the problem. But —
[1] In the West the people at the top are finance capitalists, while the various populations’ notional status as the ‘golden billion’ (780 million, more like) is dependent on property valuations and financialization. If that system changes, the people at the top won’t be the people at the top any more, and the population won’t be the golden billion (as Murphy says).
So the system won’t change — is too big to change — till a catastrophic collapse happens.
[2] Then, if you read these articles and talk to people who recognize this oncoming problem, they all subscribe to, firstly, the IPCC toy model of climate change where the oceans rise gradually over the decades and catastrophe is gradual, and, secondly, a view that the solution is Net Zero and the simple cessation of hydrocarbon emissions.
There are two kinds of climate change denialists. The first kind, obviously, are the people who deny it outright. The second kind are those who believe that the IPCC model is reality-based, that the threat is simply that the oceans and the heat will gradually rise over decades*, and Net Zero, if we could only achieve it, would save us.
*i.e. There’ll be sudden no tipping point where a phase change happens, which is just as much of a denial of basic physics as the first type of (outright) climate change denialism and also a denial of the geological record.
In other words, insurance is critical to reducing the bank’s risk once more. And they therefore insist that you will insure a property if you borrow on the security of the property in question.
Both Extinction Rebellion and 350.org, among others, believe this issue is the fulcrum to lever The Money in the FIRE Sector into Policy Advocacy on the Climate Crises.
It’s too slow going so far.
Maybe Michaelmas’ FT posting signals something. Living on Earth radio had a fluff piece on this issue on Friday.
Funny the love of money can be both the cause and potential solution, imo…
> Funny the love of money can be both the cause and potential solution, imo…
I had a similar reaction, along the lines of “The Market” might impose constraints on new construction in hazard zones, through refusal to finance, in ways that regulators are slow to do. I’m not optimistic.
I have always thought about this from the opposite direction, that the time will come in the not very distant future when it will impossible to afford home insurance here in California and impossible for insurers to accept the risk. Government last resort plans will be bankrupt. People will be forced to self insure and unable to sell homes except with drastic price cuts, as people determine the maximum loss they can risk on an uninsured home. People in my town are increasingly reporting insurance cancellations and difficulty finding a carrier that will take them so this is not future doom mongering, it is already underway just very early days. And California and Florida are just the vanguard.
The unevenly distributed future is already here?
Indeed.
Don’t look now, but most all domestic housing for sale is in excess supply in these not so united states, the prelude to a crash.
I paid $8100 this year for my house insurance, if it goes to $10k i’ll probably drop it, and not having a mortgage, it’s my call.
I will offer a defence of climate science and the IPCC, whose consensus is to recognise the continuing difficulty in modelling tipping points, and there is very considerable agreement on that.
To be fair, the IPCC have progressively refined and amended predictions, and the range of scenarios and qualifications offered.
Here in the west of Scotland, sea level rise is currently 3mm pa and has been since about 2010 – so is still very much at the low end of IPCC predictions with 300mm sea level rise by 2100.
That does not correspond to Murphy’s somewhat overstated comments – even the Thames Barrier has a current use life that extends to 2070.
Personally, I think it will be closer to 6mm pa by 2100, given current emission trends, possibly higher, but the time lag will prove to be beyond my own lifespan.
By definition tipping points are unpredictable, so are extremely difficult to model, but there are plenty of scientists involved with the IPCC who have been working on various major tipping point issues such as collapse of AMOC, the accelerating melt of the Thwaite Glacier, and clathrate release from permafrost and ocean floors.
I have followed Stefan Rahmstorf and his work on thermohaline oceanic circulation in some detail for 25 years, since he became a Prof. at Potsdam, and first highlighted the potential halting of the North Atlantic Drift as a risk. Slowing is evident, but the collapse threshold still unpredictable. Since those earlier calculations on the AMOC, he has progressively amended predictions of the likelihood of this tipping point being reached from 300-1 to potentially even being 50-50 by 2100 as the Arctic salination gradient has weakened through accelerating, and under-predicted, melting of the Greenland Ice Sheet in the last two decades.
In 2000 no-one knew of the scale of the continuing massive increase in fossil fuel emissions. Even since Paris the projected emissions up to and beyond 2030 are still rising. Leading industrial nations are reported today as actually planning to increase aggregate fossil fuel consumption in a ‘last dash’ mindset.
Yes, almost all the IPCC models have tended to understate impacts at the lower end of their predicted ranges and the 1.5ºC target for Net Zero was definitely affected by ‘realpolitik’ – such as the power of the petrostates in the COPs – and imo was always hopelessly optimistic, but then the scientists have been thwarted by the politics – viz. the persistent lack of adequate political action and the embedded and powerful sectional interests from corporate fossil fuel corporations.
There is currently no conclusive evidence that any tipping point will be exceeded, or that an accelerating incremental model of climate impacts will actually be superseded by a collapse model, whether stepped or single event. Even the great tipping point in the Permo-Triassic extinction took place over tens of thousands of years.
Yet, it is definitely a high risk strategy for corporate capitalism to follow, in ignoring what are evidently increasing risks, and also exceedingly stupid, but that is the existing economic mindset.
The precautionary principle is not really a business or political concept.
We must consider droughts, wildfires and flooding in addition to sea level rise. I view the turning of Canada’s Boreal Forest and the Amazon (once upon a time the “world’s lungs”) from carbon sinks to carbon emitters as evidence a tipping point is at hand. Canada’s ‘23 fire season produced about the same amount of carbon emissions as the globes fifth largest emitter that year, Japan.
The most pressing question is “How many more tenths of a degree C can life on earth take?”. If the betting line is the present amount of warming masked ironically by sulphate aerosols, estimated at 0.4 degrees C, I will take the under.
TiPi: I will offer a defence of climate science and the IPCC … sea level rise is currently 3mm pa and has been since about 2010 – so is still very much at the low end of IPCC predictions with 300mm sea level rise by 2100.
Thanks for your comment. James Hansen begs to differ: –
Abstract. Climate sensitivity is substantially higher than IPCC’s best estimate (3°C for doubled CO2), a conclusion we reach with greater than 99 percent confidence. We also show that global climate forcing by aerosols became stronger (increasingly negative) during 1970-2005, unlike IPCC’s best estimate of aerosol forcing. High confidence in these conclusions is based on a broad analysis approach. IPCC’s underestimates of climate sensitivity and aerosol cooling follow from their disproportionate emphasis on global climate modeling, an approach that will not yield timely, reliable, policy advice.
https://jimehansen.substack.com/p/seeing-the-forest-for-the-trees
And see that from Hansen et al. in conjunction with, forex, this pulled from NC links today: –
Formation of giant Siberian gas emission craters (GECs)
https://www.sciencedirect.com/science/article/abs/pii/S0048969725016821?via%3Dihub
Frankly, I wouldn’t ever regard Hansen as having the last word on climate change.
I have already stated I feel that some of the earlier IPCC projections were understated and given a rationale.
I first saw a video of a minor Siberian clathrate emission being flared almost 20 years ago. Even that was pretty scary, as was the then rate of permafrost loss. This potential tipping point has long been accepted as a risk. The issues remain.
First, the magnitude of the phenomenon has to be identified and then some valid conclusion on the significance reached from the empirical evidence. That has not been achieved.
For the AMOC, the rate of slowing has been estimated as being about a third, but the significance of that slow down is still a matter of speculation. It is actually pretty difficult to get hard data. When I sailed across it, even the surface current was unpredictable and variable.
Will the AMOC continue to slow or will it just cease ? Tipping point or accelerant ?
The IPCC is not some monolithic organisation – at any time there are hundreds of contributors.
It is simply unfair to criticise key IPCC contributors for a lack of attention to sensitivities and uncertainties. Assessment of uncertainty has always been an integral part of all climate modelling.
Contributing lead authors to IPCC publications are not ignorant of basic statistical concepts.
Corinne le Quéré, formerly head of the Tyndall Centre, so a major IPCC contributor, is a global authority on uncertainties in climate modelling, especially oceanic carbon sinks and in the carbon cycle. Hardly a research afterthought.
Myles Allen was actually the initiator of the Net Zero concept, and also Coordinating Lead Author for the 2018 IPCC report, and he also works on uncertainties in climate modelling.
“Recent progress has increased the confidence in uncertainty estimates and now allows a better separation of the uncertainties introduced by scenarios, physical feedbacks, carbon cycle, and structural uncertainty. Projection uncertainties are now constrained by observations and therefore consistent with past observed trends and patterns.”
Actually Myles Allen is a real hardliner on geological net zero and went public on carbon capture and storage last year. I can see his logic, but I part company with him here, as a friend who worked on one of the experimental CCS trials thinks it both impractical and undeliverable on the scale necessary. I think the reducing EROEI equation makes CCS economically unviable too.
Chaotic systems are hard to model and predict. Dr. Hanson’s recent articles do go against the IPCC, which one should feel oblidged to disclose that it has high dose of politicking in it and horse trading.
The sea level rise will be faster and will be accelerating with all the water from the land drying up and moving to the Earth Ocean, fact that wasn’t really considered until recently – NC posted an article about it not that long ago.
Anyone moving to Jellico, Kentucky from The Pacific Palisades, Los Angeles?
A couple weeks back, in a thread discussing homeowners insurance, a fellow reader commented that the real estate market will move to cash only. By that logic PE will extend their dominance over the market allowing them to maintain their smoke and mirrors mark to market valuations, at least over the near term.
The outlook is not good for the average Joe wanting to buy a house. Perhaps Private Equity will come up with a “solution” for that.
Go ahead, get rid of the illusion of an American dream of home ownership. I dare them to. If you want to see a population crash and the US government default, getting rid of the 30 yr mortgage will be the quickest way to do it.
Kurtismayfield: If you want to see a population crash and the US government default….
Quite.
Seems baked in at this point.
If you lend on the value of the structure upon the property – how much it costs to build and/or rebuild – instead of insuring the particular patch of dirt whose value is given to it by the infrustructure and services provided to it by the people who live in the area (township, town, city) then you would bring the cost of insurance down to a level that is reasonable ….. but of course, you’ll have realtors and bankers crying a river because they can’t lend enough money or grab a big enough vig to satisfy their reckless gambling and dependence upon the belief that a bigger mark will show up at the table – …all brought to you through the repeal of Glass Steagal etal.
Sobering. The entire chain of our prosperity paradigm is a nightmare. It’s unsustainable at every level. Must wonder if we are overwhelmed by disaster primarily because there are now more than 8 billion of us. The more the merrier. Mansions falling into the ocean. Looked at as a whole it’s a real head-scratcher. What’s wrong with us that we just keep doing the same futile stuff? Instead of convening a yearly Burning Man celebration we might consider a more appropriate attitude. I guess it’s a downer to have a yearly Home Owners Insurance Festival. One that also got wiped out by wildfires and flash floods. I think there’s a message here somewhere. Sustainable housing? And zoning. And while we are at it, how about the big one: sustainable banking?
Since PE likes to buy distressed resi properties, gov may not see a problem here.
Rich:poor divide continues to widen.