LSIs’ exposures to climate change related risks: an approach to assess physical risks

Maria Sole Pagliari

No 2517, Working Paper Series from European Central Bank

Abstract: This paper proposes an approach to estimate the impact of adverse climatic events on the profitability of small European banks (LSIs). By considering river flooding phenomena, we construct a unique database matching the information on location, frequency and severity of floods with the location and balance sheet data of institutions mainly operating in the areas where they are headquartered (territorial LSIs). We compare the performance of territorial LSIs across regions at low and high flooding risk and test for the “core lending channel” hypothesis, whereby lending to the real economy is a catalyst of physical risks. Results show that an adverse event dropping loans to households and non-financial corporations by one percentage point (pp) of total assets entails a decrease in the Return on Assets (ROA) of territorial LSIs in riskier areas by 0.01pps (~3.1%). Moreover, if all territorial LSIs were located in riskier areas, one bank out of two would report an average ROA between 0.0001 and 0.52 percentage points lower than what observed. JEL Classification: C33, G21, Q54

Keywords: climate change; core lending; dynamic panel regressions; LSIs; profitability (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-env
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: LSIs’ Exposures to Climate-Change-Related Risks: An Approach to Assess Physical Risks (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212517

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