Understanding drought shocks: Bank financial stability and loan performance

S. Mehmet Özsoy, Mehdi Rasteh and Erkan Yönder

Global Finance Journal, 2025, vol. 65, issue C

Abstract: Unlike other climate shocks, droughts are slow and silent, and their impacts are not immediate. We define a two-year drought shock at the bank level and quantify the impact of droughts on bank stability and performance. Applying a difference-in-differences methodology, we find drought shocks to significantly worsen Z-Score, return on assets, and stock volatility. Non-performing loans of affected banks are significantly higher compared to unaffected banks. The economic impacts are comparable to those associated with a 1 % decline in unemployment rate. We also document that affected banks close branches in drought-hit regions but do not increase their capital ratios.

Keywords: Climate risk; Drought; Bank stability; Bank financial performance (search for similar items in EconPapers)
JEL-codes: G21 G32 L25 Q25 Q51 Q54 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1044028325000274
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:65:y:2025:i:c:s1044028325000274

DOI: 10.1016/j.gfj.2025.101100

Access Statistics for this article

Global Finance Journal is currently edited by Manuchehr Shahrokhi

More articles in Global Finance Journal from Elsevier
Bibliographic data for series maintained by Catherine Liu ().