Flooded credit markets: Physical climate risk and small business lending
This publication documents how European banks charge higher interest rates on loans granted to firms in areas at high risk of flooding. Using a large cross-country data set of securitised loans, we study the impact of flooding on credit to European small and medium-sized enterprises. The intensification of climate disasters due to climate change may become an important source of financial vulnerability for European small and medium-sized businesses and, consequently, for the banks financing them.
At 6 basis points, the average risk premium is rather small, and does not adequately reflect the deterioration of loan performance in the aftermath of flood episodes, however. Firms in flooded counties are more likely to default on their loans than non-disaster firms. Floods reduce securitised credit in the local markets, suggesting that physical risks associated with climate change are borne within the banking sector.
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