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Impacts of Drought on Loan Repayment

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  • Joseph L. Breeden

    (Deep Future Analytics LLC, 1600 Lena St., Suite E3, Santa Fe, NM 87505, USA)

Abstract

In order to stress test loan portfolios for the impacts of climate change, historical events need to be analyzed to create templates to stress test for future events. Using the 2012 Midwestern US drought as an example, this work creates a stress-testing template for future droughts. The analysis connects weather and crop yield data to impacts on local macroeconomic conditions by comparing drought-impacted agricultural counties with nearby urban counties. After measuring the net macroeconomic impacts of the drought, this was used as an overlay with existing macroeconomic stress models to stress test a lender in a different part of the US for possible drought impacts. Having a library of such climate events would allow lenders to stress test their portfolios for a wide range of possible impacts.

Suggested Citation

  • Joseph L. Breeden, 2023. "Impacts of Drought on Loan Repayment," JRFM, MDPI, vol. 16(2), pages 1-14, February.
    • Handle: RePEc:gam:jjrfmx:v:16:y:2023:i:2:p:85-:d:1053638
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    References listed on IDEAS

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    1. Al-Kaisi, Mahdi & Elmore, Roger & Guzman, Jose & Hanna, Mark & Hart, Chad E. & Helmers, Matthew J. & Hodgson, Erin & Lenssen, Andrew & Mallarino, Antonio & Robertson, Alison & Sawyer, John, 2013. "Drought Impact on Crop Production and the Soil Environment: 2012 Experiences from Iowa," Staff General Research Papers Archive 35963, Iowa State University, Department of Economics.
    2. Gregor Semieniuk & Emanuele Campiglio & Jean‐Francois Mercure & Ulrich Volz & Neil R. Edwards, 2021. "Low‐carbon transition risks for finance," Wiley Interdisciplinary Reviews: Climate Change, John Wiley & Sons, vol. 12(1), January.
    3. Thomas Jacob & John Wahr & W. Tad Pfeffer & Sean Swenson, 2012. "Recent contributions of glaciers and ice caps to sea level rise," Nature, Nature, vol. 482(7386), pages 514-518, February.
    4. Jesse M. Keenan & Jacob T. Bradt, 2020. "Underwaterwriting: from theory to empiricism in regional mortgage markets in the U.S," Climatic Change, Springer, vol. 162(4), pages 2043-2067, October.
    5. Bangia, Anil & Diebold, Francis X. & Kronimus, Andre & Schagen, Christian & Schuermann, Til, 2002. "Ratings migration and the business cycle, with application to credit portfolio stress testing," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 445-474, March.
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    Cited by:

    1. Joseph L. Breeden, 2024. "An Age–Period–Cohort Framework for Profit and Profit Volatility Modeling," Mathematics, MDPI, vol. 12(10), pages 1-23, May.
    2. Gao, Wei & Ju, Ming & Yang, Tongyang, 2023. "Severe weather and peer-to-peer farmers’ loan default predictions: Evidence from machine learning analysis," Finance Research Letters, Elsevier, vol. 58(PA).

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