The Impact of Wildfires on Loss Given Default: Evidence from Defaulted Consumer Credits

Research on natural disasters and credit risk mainly focuses on default probabilities. However, post-default outcomes remain largely unexplored, making the overall impact on credit losses unclear. We address this gap by providing novel empirical evidence on the impact of wildfires on credit losses through the loss given default channel. Exploiting the richness of a proprietary database on defaulted consumer credits in Italy, we determine granular wildfires exposures using satellite-based geospatial data on burned areas. We document a robust negative relationship between wildfire exposure during the post-default recovery period and realized recovery rates. This identifies a loss given default mechanism that complements existing evidence on default risk. The effect is heterogeneous: it is stronger when a larger share of agricultural land is burned and, consistent with evidence that natural disasters affect financially fragile households more severely, further amplified by local socioeconomic vulnerability. These findings call for integrating climate considerations into credit risk management beyond default risk.