International Finance Discussion Papers (IFDP)
June 2022
The rising tide lifts some interest rates: climate change, natural disasters, and loan pricing
Ricardo Correa, Ai He, Christoph Herpfer, and Ugur Lel
Abstract:
We investigate how corporate loan costs are affected by climate change-related natural disasters. We construct granular measures of borrowers’ exposure to natural disasters and then disentangle the direct effects of disasters from the effects of lenders updating their beliefs about the impact of future disasters. Following a climate change-related disaster, spreads on loans of at-risk, yet unaffected borrowers, spike and are amplified when attention to climate change is high. Weaker borrowers with the most extreme exposure to these disasters suffer the highest increase in spreads. Importantly, there is no such effect from disasters that are not aggravated by climate change.
Keywords: Banks, climate change, loan pricing, natural disasters
DOI: https://doi.org/10.17016/IFDP.2022.1345
PDF: Full Paper
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