LSIs’ Exposures to Climate Change Related Risks: An Approach to Assess Physical Risks

This paper proposes an approach to estimate the impact of adverse climatic events on profitability small European banks (LSIs). By considering river flooding phenomena, we construct a unique database matching information location, frequency and severity floods with location balance sheet data institutions mainly operating in areas where they are headquartered (territorial LSIs). We compare performance territorial LSIs across regions at low high risk test for “core lending channel” hypothesis, whereby real economy is catalyst physical risks. Results show that event dropping loans households non-financial corporations by one percentage point (pp) total assets entails decrease Return Assets (ROA) riskier 0.01pps (~3.1%). Moreover, if all were located areas, bank out two would report average ROA between 0.0001 0.52 points lower than what observed. JEL Classification: C33, G21, Q54