Container or Content: from Flood Hazards on Firms’ Physical Assets to Credit Risks

This paper estimates the potential flood risks for the banking system in France through the non-financial corporation channel. We show the importance of going granular in assessing physical risk. First, the aggregate economic losses at the establishment level appear much higher than at the headquarter level. Second, the losses associated with transferable assets (machines and equipment) are greater than those related to real estate assets. The deterioration of these two types of assets affects the banking system through different channels. Property damages reduce the owner NFC’s assets and increase the Loss Given Default (LGD) associated to the premise, while transferable damages can affect the cash position and leverage of the occupier NFC and thus the probability of default. Bank losses associated with transferable assets (the content) are more severe than those affecting properties (the container). Current insurance schemes in France reduce flood vulnerability not only directly for firms but also limit the amplification of vulnerability through the banking system.