Is Flood Risk Priced in Bank Returns?

Abstract

Climate change related disasters are projected to increase considerably over our lifetime, and storms and floods cause the highest financial damages. Using a comprehensive future flood risk measure matched to bank holding companies in the United States, I find that a higher exposure to future flood risk results in higher excess returns. This is consistent with the interpretation that investors demand compensation for their increased risk exposure. The result is stronger for smaller and less levered banks. Furthermore, I construct a flood risk factor from bank returns that cannot be entirely explained by the conventional bank risk factors. And, I show that the flood risk factor can explain up to 30% of the variance of bank stock returns.