Flash Droughts and Bank Stability in the United States

Maxime Fajeau, Remi Generoso, Clement Mathonnat and Steven Ongena

No 22128, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Flash droughts represent a distinctive climate risk that often goes under the radar. Unlike slowly developing droughts, they rapidly deplete soil moisture, compressing the time available for borrowers and banks to adjust without necessarily producing visible destruction. Linking climate data to United States banks through their branch networks, we find that a strong flash drought reduces bank Z-scores by approximately 9 percent. Profitability weakens before credit quality deteriorates, generating persistent financial fragility. The findings show why the speed of climate deterioration matters for financial stability and why assessments focused on conventional drought measures or conspicuous disasters can overlook consequential risks.

JEL-codes: G21 (search for similar items in EconPapers)
Date: 2026-11
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