Emily Cunningham

People in retail banking seemed to have no idea. They would insist this risk wasn’t material even though they had no way of knowing. They’d say things like: - we’re geographically diversified - 5 years average refi - property insurance (lol) - mortgage insurance (mostly lol)

You know the Upton Sinclair quote about your salary depending on it? Anyway, it didn’t matter once the regulators talked to a variety of experts () and realised it was a plausible risk that deserved some analysis.

Here is the paper from May 2016. I'm afraid some of it is Australia-specific (mortgages have a unique function in our financial system, and a less-uniquely huge role in our economy) but many of the principles translate. http://www.climateinstitute.org.au/verve/_resources/TCI-There-goes-the-neighbourhood-FINAL-30052016.pdf …

The process of researching it - I spoke with many, many people - suggests to me that banks were not going to identify this risk, let alone bring it to the attention of the regulators and/or the actual public who are affected.

Btw, regulators can't fix challenges like this, although they can go some way to addressing it. Industry won't and arguably also can't (incentives matter, who knew?). It requires policy, informed by disinterested interdisciplinary expertise + insight from multiple sectors.

I’m by experience, in a post-GFC context, banks wouldn’t be the ones incentivized to track that risk (or even be officially aware of it) because then they’d look like they were stuffing it into the GSEs in bad faith. And PMI is too rigid and the asset life is too short for SLR

So here you would have the credit-risk guarantors (GSEs) and flood/storm insurance really being the binding constraints. The issue being kind-of that everyone in the chain has *some* exposure but also some level of credit-enhancement from a subordinated tier.

And the pooling of the loans doesn’t help the problem. Like say that I am buying a Freddie Mac Credit Risk Transfer STACR note with a heterogeneous mix of geographies and MSA-level disclosure. The the SLR risk is so diluted and I have enough enhancement that it doesn’t pencil out