The Rising Tide Lifts Some Interest Rates: Climate Change, Natural Disasters and Loan Pricing
74 Pages Posted: 15 Oct 2020 Last revised: 21 Jul 2023
Date Written: March 31, 2020
Banks price physical climate change risks after observing natural disasters linked to climate change. We isolate this updating process by identifying loans to borrowers at risk of, but not directly affected by, such disasters. Loan spreads for these borrowers spike in both primary and secondary markets following these disasters, while no such updating occurs for non-climate-related disasters. Banks adjust internal probabilities of default, consistent with a higher perceived credit risk. However, the observed increase in spreads is primarily explained by salience bias, as it is short-lived and amplified by media attention. This salience impacts financial decisions at bank-dependent firms.
Keywords: Banks, climate change, loan pricing, natural disasters
JEL Classification: G21, Q51, Q54
Suggested Citation: Suggested Citation