Information on Hot Stuff: Do Lenders Pay Attention To Climate Risk?

Abstract

This study shows that banks adapt to exacerbated climate risk pre-emptively by factoring market-level information into lending decisions. Geographically dispersed, multi-state, and larger banks reduce small farm lending by 2 to 3 percent more, relative to their counterparts, following a standard deviation increase in the frequency of abnormal hot temperature in a county. Banks do not reduce credit flows indiscriminately as they strategically shield markets with branch presence. Furthermore, within-bank analyses suggest significant rebalancing of farm loans across counties that differ in climate risk exposure.

Keywords: Small Farm Loans, Abnormal Temperature, Market-Level Information, Branch Network, Climate Adaptation.

JEL Classification: G21, Q14, Q54