Flood scenarios test Dutch banks’ resilience
A new study explores how severe floods in the Netherlands could affect bank capital through real estate credit risk. The researchers analyse 38 adverse flood scenarios and close to €650 billion in bank exposures backed by residential and commercial property. The results suggest that direct, uninsured flood damage would usually lead to a system-wide capital decline of 30 to 50 basis points.
What happens when flood damage is uninsured?
The study focuses on a key Dutch feature: major flood damage to property is generally not covered by standard insurance policies. This matters for banks because damaged homes and commercial buildings may lose value as collateral. When collateral values fall, loan-to-value ratios rise. This can increase expected losses, risk weights and credit risk for lenders.
Which flood risks are tested?
The researchers use 32 single-breach scenarios, where one flood defence fails, and six extreme multiple-breach scenarios. These are unlikely but severe events, including floods from rivers and coastal defence failures. The Netherlands has strong flood protection, so most scenarios affect only a limited share of properties. In the most extreme case, however, large parts of the west of the country are flooded and capital impacts are much larger.
What does this mean for financial institutions?
The findings suggest that Dutch banks appear broadly resilient to the direct credit-risk effects of severe flood damage, based on current capital levels. However, the authors warn that the study only looks at one main transmission channel: direct damage to real estate collateral. Wider effects, such as lower economic growth, business disruption, falling property demand or more frequent floods under climate change, could increase losses.
For financial and risk professionals, the study underlines the value of detailed flood scenarios, property-level data and loan-to-value information. These insights can support climate stress testing, credit risk assessment, portfolio analysis and dialogue with clients and public authorities. They also show why flood protection and climate adaptation remain important for financial stability.