The Rising Tide Lifts Some Interest Rates: Climate Change, Natural Disasters and Loan Pricing
80 Pages Posted: 15 Oct 2020 Last revised: 23 Mar 2022
Date Written: October 13, 2020
Abstract
We investigate how corporate borrowing costs are affected by natural disasters related to climate change. We construct granular measures of borrowers’ exposure to, and therefore risk associated with, various natural disasters. We then disentangle the direct effects of disasters from the effects of lenders updating their beliefs about the severity and frequency of future disasters. Following a climate change–related disaster, interest rate spreads on loans of at-risk, yet unaffected borrowers, spike both in the primary and secondary markets. These effects are amplified when attention to climate change is high and are consistent with banks’ internal assessments of higher probabilities of default for these borrowers. Importantly, there is no such effect from disasters that are not aggravated by climate change. Borrowers with the most extreme exposure to climate change and those with the least ability to absorb adverse shocks suffer the highest increase in spreads.
Keywords: Banks, climate change, loan pricing, natural disasters
JEL Classification: G21, Q51, Q54
Suggested Citation: Suggested Citation