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How Climate Change Shapes Bank Lending: Evidence from Portfolio Reallocation

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  • Ralf R. Meisenzahl

Abstract

I document how bank lending has changed in response to climate change by analyzing changes in bank loan portfolios since 2012. Using supervisory data providing loan-level portfolios of the largest U.S. banks, I find that banks significantly reduced lending to areas more impacted by climate change starting around 2015. Using flood risk and wildfire risk as proxies for climate risk, I estimate a one standard deviation increase in climate risk reduces county-level balances in banks’ portfolios by up to 4.7 percent between 2014 and 2020 in counties with large loan balances. The aggregate trend masks considerable heterogeneity. Banks reduced lending more for the riskier loans (HELOCs, CRE) and to borrowers with high credit risk. However, banks expanded lending, including riskier loans, to borrowers with the lowest credit risk in areas more impacted by climate change.

Suggested Citation

  • Ralf R. Meisenzahl, 2023. "How Climate Change Shapes Bank Lending: Evidence from Portfolio Reallocation," Working Paper Series WP 2023-12, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:96039
    DOI: 10.21033/wp-2023-12
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    References listed on IDEAS

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    Cited by:

    1. Chen, Zhenzhu & Li, Li & Tang, Yao, 2024. "Weather, credit, and economic fluctuations: Evidence from China," Journal of Economic Behavior & Organization, Elsevier, vol. 221(C), pages 406-422.
    2. Kristian S. Blickle & Evan Perry & João A. C. Santos, 2024. "Do Mortgage Lenders Respond to Flood Risk?," Staff Reports 1101, Federal Reserve Bank of New York.
    3. Dasol Kim & Luke Olson & Toan Phan, 2024. "Bank Competition and Strategic Adaptation to Climate Change," Working Paper 24-06, Federal Reserve Bank of Richmond.

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    More about this item

    Keywords

    Climate Change; Bank Lending; portfolio reallocation; Bank risk management;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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