Bank exposure to climate-related physical risk In Italy: an assessment based on AnaCredit data on loans to non-financial corporations

This study provides a first assessment of Italian banks' exposure to physical risk arising from climate change in relation to lending to non-financial corporates. Based on granular data on loans and on the likelihood of climate-related events, we quantify to what extent physical risk could impair the loan portfolios both by lowering borrowers’ capacity to pay and by decreasing the value of collateral. The analysis shows that Italian banks' exposure to physical risk is limited overall. In general, only a few small intermediaries seem to face severe potential exposure to physical risk. More than half of the risky loans are secured by collateral. However, there is a large overlap between the location of the debtor companies and the real estate collateral offered as a guarantee. Hence, the exposure through loans is highly correlated with the exposure through collateral, leading to a potential positive correlation between the probability of default (PD) and the loss given default (LGD) of exposures in the event that climate risk materializes.