Does Heat Stress Deteriorate the Quality of Banks' Loan Portfolios? Evidence from U.S. Community Banks

14 Pages Posted: 7 May 2024 Last revised: 31 May 2024

See all articles by Steffen Vollmar

Steffen Vollmar

University of Münster

Fabian Wening

University of Münster - Faculty of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 3, 2024

Abstract

Climate change affects the stability of the banking sector through physical risks and it poses a special threat to the performance of banks whose business is concentrated in the economy surrounding their headquarters. Among physical risks rising temperatures and heat waves stand out as the largest contributor to economic losses. We empirically examine non-performing loans from U.S. community banks between 2002 and 2021 and reveal a deterioration in the overall credit quality of institutions in heat-exposed regions. The results are relevant for banks and regulators, as they reveal exogenous locational disadvantages that could threaten exposed banks’ existence in the near future.

Keywords: Climate change, Physical risks, Bank loan quality

JEL Classification: G21, Q54

Suggested Citation

Vollmar, Steffen and Wening, Fabian, Does Heat Stress Deteriorate the Quality of Banks' Loan Portfolios? Evidence from U.S. Community Banks (May 3, 2024). Available at SSRN: https://ssrn.com/abstract=4816288 or http://dx.doi.org/10.2139/ssrn.4816288

Steffen Vollmar (Contact Author)

University of Münster ( email )

Schlossplatz 2
Muenster, D-48149
Germany

Fabian Wening

University of Münster - Faculty of Economics ( email )

Universitätsstr. 14-16
48143 Munster
Germany

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