Financial Institutions and Climate Shocks: Pre-emptive vs. Reactive Lending Adjustments in the Case of El Niño

Financial institutions are increasingly exposed to climate change through their balance sheets. Nonetheless, the way in which they process climate information remains poorly understood. This paper examines whether financial institutions respond reactively to natural disasters or pre-emptively to climate forecasts, using Peruvian credit registry data. Relying on revisions to El Ni˜no probability forecasts as an exogenous climate news shock, we find that financial institutions engage in forward-looking risk management during El Ni˜no episodes. Specifically, a 10-percentage-point revision increases credit growth by 0.5 basis points, compared to the typical 6 basis points of month-to-month credit growth changes. In addition, the same forecast revision increases bank capitalisation by over 1 percentage point, compared to the average capital position of 18%. The increased lending amounts to 54 million soles per month, equivalent to 6.5% of new loans issued nationwide each month. These pre-emptive adjustments occur in response to forecast revisions alone, independent of actual disasters.