Information on Hot Stuff: Do Lenders Pay Attention?

Abstract

Banks cut lending to borrowers from regions that experience an increase in abnormal temperature occurrences in the previous year. Banks pursue an active portfolio rebalancing strategy for their farm loan portfolios among counties with high market shares to avoid loan losses from borrowers’ damages from impending natural disasters. These lending cuts appear to occur in relatively large, geographically dispersed banks with lower capital ratios. Our study suggests that banks pay attention to market-level information on abnormal temperature occurrences and adapt their small farm-lending strategies even before a natural disaster strikes.

Keywords: Small Farm Loans, Abnormal Temperature, Market-Level Information, Credit Availability

JEL Classification: G21, Q14, Q15, Q51, Q54