Collateral damage: How climate impacts financing

SUITS THE C-SUITE BONAR LAURETO and MELISA TURINGAN It is therefore critical that banks adopt a more systematic approach, recognizing these climate-related physical risks not as isolated operational events, but as fundamental credit-risk drivers that materially affect ECL assumptions under IFRS 9.

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Another super typhoon, Uwan, is upon us even as communities try to recover the extreme flooding in the central Philippines from Typhoon Kalmaegi (Tino). These events are a significant escalation from historical patterns. Streets and communities that were previously considered safe were inundated, highlighting a new and expanded risk profile for these areas.

Internationally, extreme flood events have produced striking images of vehicles piled on streets or even lodged in trees, as well as significant river debris after flood surges. Such scenes have been reported following extreme floods in parts of Italy and Spain.

When a disaster strikes, damage to people and property is obvious. This article explains how major floods can significantly increase the losses banks face from unpaid loans especially when the property securing that loan, like a car, is damaged. We'll also discuss how banks must adapt their financial planning to prepare for this new reality.

This article intends to provide applications to Expected Credit Loss (ECL) modelling under IFRS 9 focusing on the Loss-Given-Default (LGD) dimension, and outlines practical adjustment approaches for banking risk management and modelling teams.

HOW FLOODED CARS INCREASE FINANCIAL RISK FOR BANKS

Motor-vehicle loans form a material slice of the Philippine consumer-loan market; according to the Bangko Sentral ng Pilipinas (BSP), motor-vehicle loans accounted for 29% of consumer loans in May 2025. When flooding inundates parking lots, highways or neighborhoods, vehicles become immediate loss magnets: damage to engines, electronic systems, interiors and structural components ensues. In major floods, vehicles may float away, collide or pile up, turning them into urban flood drifters.