July 11, 2022

At the San Francisco Fed, we are students of economics. We monitor current and future risks to the economy, including climate risk. The economic impacts of climate change, including the frequency and magnitude of severe weather events, affect each of our three main responsibilities: conducting monetary policy, regulating and supervising the banking system, and ensuring a safe and sound payment system.

“We need to think more about how to make every drop count,” California Governor Gavin Newsom said during a May meeting with leaders of the state’s largest urban water providers. . He warned that California could be forced to impose mandatory reductions across the state due to a severe drought.

In April, Utah Governor Spencer Cox declared a state of emergency due to severe drought conditions affecting the entire state. “Once again, I call on all Utahans – households, farmers, businesses, governments and other groups – to carefully consider their needs and reduce their water usage.”

Of course, it’s not just California and Utah struggling with record drought. Drought brings economic consequences, including increased fire risk, water restrictions, increased insurance costs and more. Of course, it’s not just California and Utah struggling with record drought – the impacts are being felt throughout the Twelfth District. According to the journal Nature Climate Change, the mega-drought in the western United States produced the region’s driest two decades in at least 1,200 years.

Here is an overview of the drought-related impacts felt in the district during the first quarter of 2022:

Drought intensity worsens

According to the US Drought Monitor, almost 95% of the western region was experiencing drought conditions. As a result, the district experienced a decline in water supply from the Colorado River and several other watersheds and had already begun to experience intense wildfires. The link between drought and wildfires is complex. According to the National Integrated Drought Information System, drought can be a contributing factor to wildfires. Dry, hot, and windy weather combined with dry vegetation (due to reduced snow accumulation and flow, dry soils, and widespread tree death) can increase the risk of wildfires. large-scale forest.

Federal water managers declared the first-ever water shortage along the Colorado River last year, causing outages for some of the river’s 40 million users. The Great Salt Lake has lost half of its water in the past 150 years, and Lake Powell’s water level is down 28 feet from last year. Through May 1, California’s aggregate intrastate storage reservoirs were nearly 30% below average and those from out of state (including the Colorado River) were only half of the average historical levels.

Most of the land in the western region of the Drought Monitor remained dry until May 3. In much of the district, drought intensity has worsened since late 2021 due to a dry spring. Forecasts from the National Oceanic and Atmospheric Administration and the National Interagency Fire Center suggest the drought will continue and wildfire risk will remain heightened across much of the district. Notably, many of California’s most destructive fires since 1991 have occurred in the past five years, setting an ominous precedent.

Dry and windy conditions have already contributed to increased wildfire activity in 2022. Year-to-date through June 13, the National Fire Information Center has tracked 29,827 fires which have burned more than 2.6 million acres nationwide, well above a 10-year average of 23,070 fires and 1.1 million acres. New Mexico and Texas have scorched more than half of the scorched land area since the start of the year, while the district states accounted for about 29%, led by Alaska. As we head into “fire season”, the level and magnitude of fire activity in the district will likely increase. For example, in 2021, the Twelfth District wildfires consumed more than 5.1 million acres, representing 73% of all wildfire area nationwide.

Figure 1
Drought severity, western region

Drought Severity measured as percentage of land in drought, Western Region.

West = twelfth district plus MT and NM. Source: University of Nebraska-Lincoln, United States Department of Agriculture, National Oceanic and Atmospheric Administration, 5/3/2022

Increased risks in the twelfth arrondissement

As many Westerners know, drought presents an increased risk of wildfires to their homes, businesses and communities. In addition, it creates unique economic challenges for borrowers who depend on water quality and accessibility, such as farmers, ranchers, food and beverage producers, hydroelectric generators, miners metals and businesses related to aquatic recreation (for example, centered around lakes or rivers). Although most banks in the Twelfth District do not directly hold a high concentration of agricultural and agricultural loans, they are exposed to economies centered on agricultural activity, for example in the Central Valley of California, the West of the Oregon, eastern Washington, southern Idaho and parts of other district states. According to the USDA’s Economic Research Service, “In areas that depend on rainfall for crop production, drought can decrease crop and livestock production and can severely affect farm profitability. The drought also reduces the amount of snowpack and the flow available for diversions to irrigated agricultural land. These impacts can affect all local, regional and national economies. They then classified, as of March 8, 2022, more than 20% of land in western states as experiencing extreme or exceptional drought.

District banks face financial and operational risks in the event of wildfires, as they may have to restrict the operations of branches located in fire-prone or evacuation-prone areas. Fire insurance provides a layer of protection for secured home loans, but as many homeowners know, wildfire activity has affected the cost and availability of risk insurance, which could potentially exert pressure on real estate values ​​in certain areas.

In absolute terms, California has the most at-risk properties in the district due to its large size; however, the relative share of at-risk properties may be higher in other states in the district. For example, CoreLogic’s Wildfire 2021 report indicates that the percentage of homes at high risk for extreme wildfire activity is higher in Idaho, Utah, and Nevada than in California.

For more details on economic and banking conditions across the District, visit the First Look 12L 1Q22 report.

Elizabeth Lawson-Kurdy is the Communications Manager for Supervision + Credit within the Communications + Experience team at the Federal Reserve Bank of San Francisco.

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The views expressed herein do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System.


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