Smart thought of the week: Stress

Imagine what would happen if one day your insurer told you that it could no longer underwrite the policy on your home because it was at grave risk of rising sea levels.

What would happen to the value of your property?

Now multiply that same problem across the hundreds and thousands of properties in your vicinity.

Probably all those property owners - just like you - would have an almost insoluble problem to deal with. Additionally, banks that have lent money against those properties will have an even bigger problem….

It could easily punch a gaping hole in their balance sheets. It could make the Great Financial Crisis of 2008 look like child's play.

That is just one of the many connections between climate change and finance.

Consequently, central banks are looking at how commercial lenders can cope with those unquantifiable stresses. They could force banks to hold even more capital than they already have, to weather this type of impact on asset values.

Of course, it hasn't happened yet. But governments that ignore climate change are being put on notice.

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Climate change is real. The raging forest fires in California is real. The melting of the polar icecaps are real. Rising sea levels are real. Warming oceans are real. The drying up of Victoria Falls in Zimbabwe is real. Record high temperatures in Australia is real.

But many governments around the world continue to ignore the obvious.

But now they are no longer just dealing with scientists and environmentalists that they simply call crackpots. They are dealing with central bankers and regulators that could implement unpalatable rules that could force banks to put more shock absorbers in place.

Governments have been warned. Banks have been warned….

They can either take remedial steps now to avert an environmental catastrophe or face the possibility of painful regulatory medicine meted out by regulators later that could have painful financial consequences.

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This article was first published in The Smart Investor. All content is displayed for general information purposes only and does not constitute professional financial advice.