When faced with reality: How extreme weather events influence bank lending

We combine precise geolocation data on firms with detailed loan-level information to examine how an extreme weather event influences banks’ perceptions of climate-related risks. We focus on the severe flooding that occurred in Slovenia in August 2023 and analyse changes in the borrowing terms offered to firms situated in flood-prone areas that were not directly affected by the disaster. We find that banks revise their assessment of climate risk following the flood, as evidenced by tighter lending conditions for exposed firms. Specifically, high-risk firms experience a decline in outstanding loan amounts and an increase in borrowing costs. We also find some evidence that the impact is more pronounced for loans with short maturity and no collateral and less pronounced for firms with a relationship with a single bank. • We combine the precise geographical location of firms with detailed loan-level data to investigate if an extreme weather event prompts banks to revise their perception of climate risks. • Focusing on the severe flood event in Slovenia in August 2023, we examine changes in the borrowing terms of companies that are located in flood-prone areas but were not directly impacted by the disaster. • Banks reconsider climate risks after a climate-related large-scale natural disaster and tighten lending conditions for exposed companies. • Exposed companies are faced with declining outstanding loan amounts and higher borrowing costs. • The impact is more pronounced for loans with low maturity and no collateral and less pronounced for firms with a relationship with a single bank.