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A climate stress testing exercise on loans to European small and medium enterprises

Author

Listed:
  • Chen, Yujia
  • Ding, Zhenghong
  • Barbaglia, Luca
  • Calabrese, Raffaella
  • Fatica, Serena

Abstract

We develop a micro-level climate stress testing framework to evaluate the financial performance of small business loans under diverse climate scenarios. Focusing on European small and medium-sized enterprises (SMEs), we estimate the impact of coastal, flash, and river floods on loan default risk using a discrete-time survival model. Our analysis reveals that flood events significantly increase SME loan default probabilities in countries such as Spain and France. However, this effect is notably reduced in regions with strong infrastructure or effective support mechanisms. To complement the empirical findings, we conduct a forward-looking stress testing exercise that projects default probability trajectories under varying flood severity scenarios. This approach enables financial institutions and regulators to quantify the loan-level credit risk associated with climate-related flooding, offering valuable insights for risk management and policy design.

Suggested Citation

  • Chen, Yujia & Ding, Zhenghong & Barbaglia, Luca & Calabrese, Raffaella & Fatica, Serena, 2026. "A climate stress testing exercise on loans to European small and medium enterprises," Energy Economics, Elsevier, vol. 155(C).
    • Handle: RePEc:eee:eneeco:v:155:y:2026:i:c:s0140988326000563
    DOI: 10.1016/j.eneco.2026.109177
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    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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