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Hydrogeological and credit risk: the italian firms' physical risk-adjusted probability of default

Author

Listed:
  • Manuel Cugliari

    (Bank of Italy)

  • Simone Narizzano

    (Bank of Italy)

  • Federica Vassalli

    (Bank of Italy)

Abstract

We assess the impact of climate-related physical risks on the one-year default probability (PD) of Italian non-financial firms, focusing on hydrogeological risks such as floods and landslides. We compile a dataset combining firms’ financial data with the geographic location of their operational units, matched to hazard levels. We develop a discrete risk indicator, and financial statements and PDs are adjusted to reflect climate-related physical risks. Our analysis shows that 38 per cent of firms are exposed to hydrogeological risks, with notable regional and sectoral differences. On average, exposure leads to a small increase in PD and limited economic impact, with negligible effects on collateral used in monetary policy operations. However, firms in high-risk areas suffer a significant drop in creditworthiness. Insurance coverage mitigates this effect, reducing the PD impact by half. These findings reflect current conditions. Without effective climate policies, the frequency and severity of extreme events are likely to increase in the future, thus amplifying the negative effects on firms’ credit profiles.

Suggested Citation

  • Manuel Cugliari & Simone Narizzano & Federica Vassalli, 2026. "Hydrogeological and credit risk: the italian firms' physical risk-adjusted probability of default," Mercati, infrastrutture, sistemi di pagamento (Markets, Infrastructures, Payment Systems) 77, Bank of Italy, Directorate General for Markets and Payment System.
    • Handle: RePEc:bdi:wpmisp:mip_077_26
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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