The Impact of Climate Change on the Cost of Bank Loans

79 Pages Posted: 4 Dec 2020 Last revised: 19 Feb 2021

See all articles by Siamak Javadi

Siamak Javadi

University of Texas - Rio Grande Valley

Abdullah Al Masum

The University of Texas-Rio Grande Valley

Date Written: February 3, 2020

Abstract

We find that firms in locations with higher exposure to climate risk, as measured by drought conditions, pay significantly higher spreads on their bank loans. Exploiting the economic link between a firm and its customers, we also show that the exposure of a firm’s customers to climate risk increases that firm’s cost of borrowing. Cross-sectional analysis indicates that the effect is driven by the long-term loans of poorly rated firms. Overall, our evidence suggests a slow increase in lenders’ attention to climate risk and that lenders have yet to fully understand and price all dimensions of this risk.

Keywords: Climate change, cost of bank loans, loan spread

JEL Classification: G21, G32, Q54

Suggested Citation

Javadi, Siamak and Masum, Abdullah Al, The Impact of Climate Change on the Cost of Bank Loans (February 3, 2020). Available at SSRN: https://ssrn.com/abstract=3717013 or http://dx.doi.org/10.2139/ssrn.3717013

Siamak Javadi

University of Texas - Rio Grande Valley ( email )

1201 W. University Dr.
Edinburg, TX 78539
United States

Abdullah Al Masum (Contact Author)

The University of Texas-Rio Grande Valley ( email )

1201 West University Dr.
Edinburg, TX 78539
United States

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