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Extreme Rainfall and Municipal Financing: Risk Pricing and Adaptive Mitigation by Sponge Cities

Author

Listed:
  • Li Li

    (Peking University, Guanghua School of Management, Students)

  • Xiangyang Li

    (Nankai University)

  • Steven Ongena

    (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))

  • Yabin Wang

    (Norwegian University of Science and Technology)

Abstract

How do extreme weather and climate adaptation affect local financing cost? To answer this question, we examine the impact on Chinese municipal corporate bonds of both extreme rainfall and the Sponge City Pilot program. A one standard deviation increase in rainfall raises bond issuance spreads by 16 bps on average, but Sponge Cities manage to more than offset that. Further analysis demonstrates that the savings from reduced borrowing costs, coupled with broader economic gains in employment and corporate profits, far outweigh the program's investment costs. These findings underscore the importance of urban resiliency in shielding local finances from climate risks.

Suggested Citation

  • Li Li & Xiangyang Li & Steven Ongena & Yabin Wang, 2025. "Extreme Rainfall and Municipal Financing: Risk Pricing and Adaptive Mitigation by Sponge Cities," Swiss Finance Institute Research Paper Series 25-25, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2525
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    More about this item

    Keywords

    Extreme rainfall; Municipal corporate bond; Climate adaptation; Climate finance;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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