•  European regulators want banks to improve geographic analysis of physical climate exposures
• Privacy rules can restrict access to detailed property and insurance information
• Long-term bank lending creates a mismatch with insurance policies repriced annually
• Deutsche Bank incorporates physical climate risk when assessing mortgage collateral
• UniCredit has allocated €100 million in provisions for climate-related risks
• Europe's 2026 heat waves could reduce GDP by around 1%, according to Triodos Bank 

European banks are struggling to measure their exposure to worsening extreme weather as privacy restrictions and gaps in insurance data complicate efforts to satisfy regulators demanding more sophisticated climate risk management.

Regulators are intensifying scrutiny of how lenders incorporate wildfires, floods, droughts and other physical climate threats into credit risk and pricing models.

But banks say accurately calculating potential losses requires granular information about properties and customers’ insurance coverage that is not always accessible under European and national data-protection rules.

One major European lender said the restrictions prevent it from accurately assessing potential losses, highlighting a growing tension between regulatory expectations and the information banks can legally obtain.

Jean Boissinot, director of risk and research at French regulator Autorité de Contrôle Prudentiel et de Résolution, said the “main area for improvement” is understanding the detailed geographical distribution of exposures.

Banks need to know “where the assets they finance are located, or where the assets are that underlie the loans taken out by a customer or a company,” he said.

Insurance represents another critical variable. Boissinot said potential bank losses “depend heavily on assumptions regarding insurance coverage,” describing insurance as generally the first line of defense against physical climate risks.

The problem is particularly acute for mortgages. The European Central Bank has acknowledged that privacy rules add complexity to obtaining sufficiently detailed residential real estate information.

Banks and insurers also operate across radically different time horizons. Insurers can reassess risks annually, increasing premiums or withdrawing coverage as conditions deteriorate.

Banks, by contrast, may remain exposed through mortgages lasting 20 or 30 years.

That creates the possibility that a property considered adequately insured when a mortgage is originated becomes increasingly vulnerable years later.

Adair Turner, chair of Chubb Europe and former head of Britain's financial regulator, described the mismatch as an “asymmetry of duration.”

“The whole insurance industry works on one-year contracts,” Turner said, whereas banks “are on the hook for more.”

The financial implications are potentially significant. Triodos Bank has estimated that Europe's 2026 heat waves could ultimately reduce regional GDP by around 1%, equivalent to approximately €180 billion.

Allianz estimated that the June heat wave alone reduced economic output by 0.3 percentage point.

Banks are already attempting to close their information gaps. One major lender is establishing precise geolocation data for homes and factories and feeding the resulting analysis into internal risk processes.

Deutsche Bank assesses physical climate risks affecting collateral before issuing home loans, with the climate characteristics of a property's location potentially influencing lending terms.

Others are building potential losses directly into provisions. UniCredit has added €100 million in provisions specifically for climate-related risks and is working with corporate customers to reduce exposures, including requesting changes to business strategies in some cases.

The danger is that climate risk does not remain static for the lifetime of a loan. Wildfire, flood or drought exposure can intensify while insurance availability and affordability deteriorate.

For banks, that could leave collateral increasingly exposed precisely when the protection assumed when the loan was written is disappearing.