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Kate Zerrenner headshot

Climate Change is Hurting Community and Agricultural Banks

A recent report from the U.S. federal government highlighted climate risks for the financial sector. Big banks will likely weather the storm in the near term, but one part of the financial system is already reeling: community and agricultural banks. 
By Kate Zerrenner
climate change is hurting community and agricultural banks

A recent report by a subcommittee of the U.S. Commodity Futures Trading Commission (USCFTC) highlights the financial sector's vulnerability to the impacts of climate change. In addition to the direct impacts relating to assets, regulatory uncertainty due to the lack of a national plan to address climate change makes preparing for disruptions an even bigger challenge. The big national banks will likely be able to adjust to sudden extreme weather events, at least in the near- and medium-term, but one part of the financial system is already reeling: community and agricultural banks. 

Impacts to community and agricultural banks

Community and agricultural banks typically serve smaller and more rural communities. They are invested in and of the communities they serve. They do not hold the same level of assets as major national financial institutions and are therefore more vulnerable to major shocks. Every state has community banks, but the top five standouts from a climate perspective are Texas, Illinois, Minnesota, Iowa, Missouri and Kansas. All of these states have suffered significant climate impacts in the past few years. Similarly, agricultural banks, which focus on farmers, are primarily located in and lend to farmers in Midwestern states.

Recent floods are only one of the climate impacts already felt in the Midwest. Droughts and heatwaves put additional stress on farmers. Tornadoes, historically mostly in the center of the Midwest, are starting to move eastward across the region as climate change progresses. The USCFTC report notes these smaller banks are responsible for 30 percent of the nation’s commercial real estate loans. Further they make up about 33 percent of community and agricultural banks’ portfolios, compared with only 5 percent of the larger banks’. Extreme weather events not only destroy homes, farms and businesses, but as they increase in intensity or number, the community and agricultural banks that serve affected communities will be stretched thin.

In a research study done on climate impacts to financial stability by the Federal Reserve Bank of San Francisco, officials noted "there is a real possibility that real estate values in some communities will be decreasing due to increased flood risk” and that “at some point in the next 20 to 30 years, absent substantial new approaches to reducing and managing flood risk, there may be a threat to the availability of the 30-year mortgage in various vulnerable and highly exposed areas.” In other words, community banks will struggle to remain viable alongside the communities they serve.

Improving resilience in community and agricultural banks

Given that the impacts are already felt, these community and agricultural banks can take steps now to mitigate their risk. They, along with the major banking institutions, should undertake thorough climate risk analysis research — including potential impacts of their assets — and implement strategies and policies to prioritize more sustainable lending.

Agricultural banks, in particular, would benefit from incorporating resilience into the value stream. Short-term financial products do not adequately address some measures like extended crop rotations or conservation practices, which could improve the resilience of the farm and the banks.

Community banks could benefit by incorporating more sustainable practices into their lending portfolios, especially investments in energy efficiency and distributed renewable energy systems to increase the community’s resilience. 

Community and agricultural banks are a vital component of the financial health of many small and rural communities across the country, especially the middle swathe from Texas to Minnesota. Climate change poses a risk to their viability in the future, and with it, the viability of the communities they serve. The effects of climate change are already being felt; action to mitigate those effects is overdue.

Image credit: Kelly Sikkema/Unsplash

Kate Zerrenner headshot

Kate is a writer and policy wonk, with a focus on water, clean energy, climate change and environmental security. She spent over a decade running energy-water nexus and energy efficiency programs at Environmental Defense Fund as well as time at the U.S. Departments of Energy and Defense, U.S. Government Accountability Office, and state and federal legislatures. She serves as an Advisory Board member of CleanTX, which aims to accelerate the growth of the clean tech industry in Texas.

Read more stories by Kate Zerrenner