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Flooded credit markets: physical climate risk and small business lending

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Abstract

We document that European banks charge higher interest rates on loans granted to firms in areas at high risk of flooding. At 6 basis points, the average risk premium is rather small, and does not adequately reflect the deterioration of loan performance in the aftermath of flood episodes, however. Firms in flooded counties are more likely to default on their loans than non-disaster firms. Floods reduce securitised credit in the local markets, suggesting that physical risks associated with climate change are borne within the banking sector.

Suggested Citation

  • Barbaglia, Luca & Fatica, Serena & Rho, Caterina, 2023. "Flooded credit markets: physical climate risk and small business lending," JRC Working Papers in Economics and Finance 2023-14, Joint Research Centre, European Commission.
    • Handle: RePEc:jrs:wpaper:202314
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    File URL: https://publications.jrc.ec.europa.eu/repository/handle/JRC136274
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    Cited by:

    1. Fontana, Adele & Jarmulska, Barbara & Schwarz, Claudia & Scheid, Benedikt & Scheins, Christopher, 2025. "From flood to fire: is physical climate risk taken into account in banks’ residential mortgage rates?," Working Paper Series 3036, European Central Bank.
    2. Serena Fatica & Ioanna Grammatikopoulou & Dominik Hirschbühl & Alessandra La Notte & Domenico Pisani, 2024. "European SMEs’ Exposure to Ecosystems and Natural Hazards: A First Exploration," Sustainability, MDPI, vol. 16(11), pages 1-21, June.
    3. Chen Yujia & Ding Zhenghong & Barbaglia Luca & Calabrese Raffaella & Fatica Serena, 2025. "A climate stress testing exercise on loans to European small and medium enterprises," JRC Working Papers in Economics and Finance 2025-06, Joint Research Centre, European Commission.
    4. Flavio de Carolis & Vinzenz Peters, 2025. "European SMEs, Corporate Finance and Economic Resilience to Floods," Working Papers 832, DNB.

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    Keywords

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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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