How Climate Change Shapes Bank Lending: Evidence from Portfolio Reallocation

Ralf R. Meisenzahl

No WP 2023-12, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: I document how bank lending has changed in response to climate change by analyzing changes in bank loan portfolios since 2012. Using supervisory data providing loan-level portfolios of the largest U.S. banks, I find that banks significantly reduced lending to areas more impacted by climate change starting around 2015. Using flood risk and wildfire risk as proxies for climate risk, I estimate a one standard deviation increase in climate risk reduces county-level balances in banks’ portfolios by up to 4.7 percent between 2014 and 2020 in counties with large loan balances. The aggregate trend masks considerable heterogeneity. Banks reduced lending more for the riskier loans (HELOCs, CRE) and to borrowers with high credit risk. However, banks expanded lending, including riskier loans, to borrowers with the lowest credit risk in areas more impacted by climate change.

Keywords: Climate Change; Bank Lending; portfolio reallocation; Bank risk management (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Pages: 39
Date: 2023-03-30
New Economics Papers: this item is included in nep-env
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Citations: View citations in EconPapers (5)

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https://doi.org/10.21033/wp-2023-12

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