Hydrogeological and credit risk: the italian firms' physical risk-adjusted probability of default

Manuel Cugliari (), Simone Narizzano () and Federica Vassalli ()
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Manuel Cugliari: Bank of Italy
Simone Narizzano: Bank of Italy
Federica Vassalli: Bank of Italy

No 77, Mercati, infrastrutture, sistemi di pagamento (Markets, Infrastructures, Payment Systems) from Bank of Italy, Directorate General for Markets and Payment System

Abstract: We assess the impact of climate-related physical risks on the one-year default probability (PD) of Italian non-financial firms, focusing on hydrogeological risks such as floods and landslides. We compile a dataset combining firms’ financial data with the geographic location of their operational units, matched to hazard levels. We develop a discrete risk indicator, and financial statements and PDs are adjusted to reflect climate-related physical risks. Our analysis shows that 38 per cent of firms are exposed to hydrogeological risks, with notable regional and sectoral differences. On average, exposure leads to a small increase in PD and limited economic impact, with negligible effects on collateral used in monetary policy operations. However, firms in high-risk areas suffer a significant drop in creditworthiness. Insurance coverage mitigates this effect, reducing the PD impact by half. These findings reflect current conditions. Without effective climate policies, the frequency and severity of extreme events are likely to increase in the future, thus amplifying the negative effects on firms’ credit profiles.

Keywords: credit risk; physical risk; probability of default; hydrogeological risk (search for similar items in EconPapers)
JEL-codes: C14 C55 G24 G32 Q54 (search for similar items in EconPapers)
Date: 2026-02
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wpmisp:mip_077_26

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