A Case Study of the Impact of Climate Change on Agricultural Loan Credit Risk

Jagdeep Kaur Brar, Antoine Kornprobst, Willard John Braun, Matthew Davison and Warren Hare
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Jagdeep Kaur Brar: Department of Mathematics & Statistics, University of British Columbia, Okanagan Campus (UBCO), Kelowna, BC V1V 1V7, Canada
Antoine Kornprobst: School of Statistics & Actuarial Sciences, University of Western Ontario (UWO), London, ON N6A 3K7, Canada
Willard John Braun: Department of Computer Science, Mathematics, Physics and Statistics, University of British Columbia, Okanagan Campus (UBCO), Kelowna, BC V1V 1V7, Canada
Matthew Davison: School of Statistics & Actuarial Sciences, University of Western Ontario (UWO), London, ON N6A 3K7, Canada
Warren Hare: Department of Mathematics, University of British Columbia, Okanagan Campus (UBCO), Kelowna, BC V1V 1V7, Canada

Mathematics, 2021, vol. 9, issue 23, 1-23

Abstract: Changing weather patterns may impose increased risk to the creditworthiness of financial institutions in the agriculture sector. To reduce the credit risk caused by climate change, financial institutions need to update their agricultural lending portfolios to consider climate change scenarios. In this paper we introduce a framework to compute the optimal agricultural lending portfolio under different increased temperature scenarios. In this way we quantify the impact of increased temperature, taken as a measure of climate change, on credit risk. We provide a detailed case study of how our approach applies to the problem of optimizing a portfolio of agricultural loans made to corn farmers across different corn producing regions of Ontario, Canada, under various climate change scenarios. We conclude that the lending portfolio obtained by taking into account the climate change is less risky than the lending portfolio neglecting climate change.

Keywords: credit risk; climate change scenario; conditional value at risk; optimal lending portfolio (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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