Assessing and managing natural disaster risks for the financial sector in Thailand

June 02, 2025

The victims of flood navigating the road to Preedi in October 2011. | © Shutterstock.com

In 2011, Thailand’s worst floods in over 50 years caused US$46.5 billion in damages, worth 12.6 percent of gross domestic product. Thailand is no stranger to the impacts of climate change. The country faces increasing threats from heavy rainfall, sea level rise, floods, and droughts. Historically, floods and storms have been the most frequent natural hazards, affecting up to 1 million people almost every year since 1990. More recently, the 2024 flood caused significant economic losses across multiple provinces, through damage to infrastructure and housing as well as effects on the agriculture and tourism sectors.

These disaster episodes show how important it is to understand and manage the impacts of climate events on the economy and the financial sector. Around the world, financial authorities are worried that worsening climate-related risks could threaten financial stability through various channels. For instance, severe floods and storms can destroy assets and disrupt business operations, leading to increased nonperforming loans in affected regions and industries. Financial institutions need to be able to assess these risks. However, this is not an easy task. It requires connecting multiple complex tools and staying updated with the latest advancements in this rapidly evolving field.

The World Bank and the Bank of Thailand collaborated to study how floods affect the economy and banks. Using climate data from global and domestic sources, along with detailed bank lending data by sector and location, the analysis considers a flood risk scenario impacting Bangkok and neighboring provinces. This scenario is informed by past events like the 2011 floods and considers the potential exacerbation of risks due to climate change. Our methodology calculates the total economic impact of floods by looking at both direct and indirect effects. Direct impacts are assessed by combining physical and economic data to evaluate the damage to productive assets. This leads to an estimation of production loss during the flood year. The E3-Thailand macroeconomic model is then used to estimate the wider economic effects, including those on the labor market. Financial sector impacts are deduced from the model's sectoral production and value-added figures.

In our flood scenario, output could fall by up to 10 percent. Microeconomic transmission channels through which banks’ individual counterparties are affected include, for instance, impacts on firm revenues and profitability (due to business disruption and costs associated with reconstruction or stock replacement). These factors could lead to an increase in nonperforming loans and affect asset prices for banks. Macroeconomic transmission channels via, for example, widespread impacts on economic growth arising from the broader indirect impacts of extreme events, can also be a significant means by which risks to banks materialize. Analysis of bank-level data suggests that the Chao Phraya River is one of the most significant sources of flood risk to the financial sector due to the confluence of high hazard and lending exposures along the river, including in Bangkok. 41 percent of corporate lending by banks is located in districts with high riverine flood risk, and 7 percent in districts with very high risk.

These results indicate that climate-related physical risks could have material impacts on the economy and the financial sector. Therefore, it is crucial for financial sector authorities and institutions to build the capacity to assess accurately and manage these risks. In response to this need, the World Bank team, in collaboration with the Bank of Thailand, organized a two-day workshop focused on climate physical risk assessment for Thailand's banking sector. The workshop, attended by 120 participants, provided a comprehensive overview of various methodologies and included practical exercises to help participants apply these concepts. To evaluate their individual climate risk assessment systems, the Bank of Thailand also requested banks to utilize the scenarios provided by the World Bank. Looking ahead, these results should not be seen as an endpoint, but rather as a foundation and a call for action to strengthen climate risk management, supervision, and disclosure, in line with international guidance and best practices.

The blog was originally published in World Bank Blogs - Link here.

Michaela Dolk

Financial Sector Specialist with the World Bank Group’s Finance, Competitiveness, and Innovation Global Practice

World Bank Group

Michaela is a Financial Sector Specialist with the World Bank Group’s Finance, Competitiveness, and Innovation Global Practice. Her work focuses on crisis and disaster risk finance, as well as climate-related financial risks. Prior to joining the World Bank, Michaela worked in the (re)insurance sector, where she worked on catastrophe risk model development, and supported reinsurance and insurance-linked securities transactions. Earlier, she worked with the Commonwealth Scientific and Industrial Research Organization in Australia on hydrological and climate change modelling. Michaela holds an MSc in Water Science, Policy and Management from the University of Oxford.

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CO-AUTHORS

Nepomuk Dunz

Financial Sector Economist

World Bank Group

Nepomuk Dunz is a Financial Sector Economist in the World Bank Group’s Finance, Competitiveness, and Innovation Global Practice, currently based in Washington DC. His work focuses on macro-financial stability as well as climate- and nature-related financial risks and opportunities, where he has contributed to technical analysis as well as policy and advisory services in multiple World Bank client countries. Nepo holds a B.Sc. in International Economics and European Studies from University of Tübingen, and a M.Sc. in Socio-Ecological Economics as well as a Doctorate in Climate Macroeconomics and Finance, both from Vienna University of Economics and Business (WU) in Austria. During his doctorate, Nepomuk Dunz also worked at the International Institute for Applied Systems Analysis (IIASA) and as a PhD Trainee in the Macroprudential Policy and Financial Stability Division of the European Central Bank (ECB), contributing to the development of ECB’s climate stress test framework.

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François Lesage

Senior Financial Sector Specialist

World Bank Group

François Lesage is a Senior Financial Sector Specialist in the Finance, Competitiveness, and Investment Global Practice of the World Bank Group. He advises governments and financial regulators in emerging markets and developing economies on policies to green their financial systems. He also coordinates the World Bank’s engagement with the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and has led the publication of key NGFS reports on transition planning. Before joining the World Bank, François headed the risk management unit at Banque de France, overseeing risks related to the monetary policy operations, reserve management and own funds. He previously held positions at the European Central Bank and the French Prudential Supervisory Authority, where he participated in international negotiations on financial regulations (Basel III, CRR/CRD, IFR/IFD).

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Hector Pollitt

Senior Economist

World Bank Group

Hector Pollitt is a Senior Economist for the World Bank, specializing in climate and macroeconomic modeling. His work focuses on the intersection of climate change and economic development in East and Southeast Asia, where he supports governments in designing policies that integrate climate risks and opportunities into long-term growth strategies. He contributes to the World Bank’s Country Climate and Development Reports (CCDRs) and other flagship products, covering both adaptation and mitigation policy analysis. Prior to joining the World Bank, Mr. Pollitt was Director, Chief Economist, and Head of Modelling at Cambridge Econometrics, where he led the development of the E3ME macroeconometric model used globally for energy, environmental, and economic policy assessments. His work has informed clients including the European Commission, UN agencies, and national governments. He holds a PhD from the University of Cambridge, where his research focused on integrating complexity into standard economic frameworks, and has authored numerous publications on green growth, decarbonization, and economic resilience.

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