The Impact of a Drought on Banking Credit and Risk: 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 7 p.p. y-o-y lower (at the bank-firm level) and 10 p.p. y-o-y lower than to firms not exposed to the event (in real terms in both cases). Non-performing loans (NPLs) to exposed firms increased close to 8/9 p.p. more than to unaffected firms. When considering a staggered impact of the drought across firms, credit growth was even lower, while NPL increase was comparable. Credit supply appears to have decreased more to firms in sectors affected by the drought (by around 3 p.p.). We control for possible confounding factors: interest rate and foreign exchange regulation; and fiscal measures. We also compare banks which were more or less exposed to affected firms: their credit, liquidity, and NPLs. We find no significant differences in credit and NPLs 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 ex post risk, but no discernible systemic effect on banks.