The impact of a drought on financial stability: evidence from Argentina

We assess the impact of a drought on credit, risk and bank performance in Argentina, using credit registry data at the bank-firm level. We estimate difference-in- difference panel data models to measure whether the drought in 2022-23 had an impact on credit to firms and non-performing loans, controlling for banks and borrowers’ features. We identify borrowers exposed to the shock as companies carrying out activities that suffered most from the drought: producers and exporters of soybean, corn and wheat. Our findings suggest that credit to firms exposed to the drought was 5 p.p. y-o-y lower (when measured at the bank-firm level) and 8 p.p. y-o-y lower than to firms not exposed to the event (in real terms in both cases). Non-performing loans to exposed firms increased close to 6 p.p. more than to unaffected firms. When considering staggered impact of the drought across firms, credit growth was even lower, while NPL increase was comparable. Credit supply decreased more to firms in sectors affected by the drought (by around 2p.p.); it may have been influenced by regulation. But higher overall estimates suggest that factors other than regulation and those accounted for in firm and bank controls, individual and time fixed effects, were at play to reduce credit –namely the drought. We also look at bank performance following the drought, comparing banks which were more or less exposed to affected firms: their credit, liquidity, and non-performing loans. We find no significant differences for banks more exposed to the drought, weighted by credit size. Our results indicate that the drought had significant individual impacts on firms credit and their ex post risk, but no discernible systemic effect on banks.