March 2023 issue contents
LSIs' Exposures to Climate-Change-Related Risks: An Approach to Assess Physical Risks

Maria Sole Pagliari, Banque de France


This paper proposes an approach to estimate the impact of adverse climatic events on the profitability of small European banks (LSIs). By considering river flooding phenomena, we construct a unique database matching the information on location, frequency, and severity of floods with the location and balance sheet data of institutions mainly operating in the areas where they are headquartered (territorial LSIs).We compare the performance of territorial LSIs across regions at low and high flooding risk and test for the "core lending channel" hypothesis, whereby lending to the real economy is a catalyst of physical risks. Results show that an adverse event dropping loans to households and non-financial corporations by 1 percentage point of total assets entails a decrease in the return on assets (ROA) of territorial LSIs in riskier areas by 0.001 percentage point (3.1 percent). Moreover, if all territorial LSIs were located in riskier areas, the average ROA would drop by between 0.0001 and 0.52 percentage point for half of the banks in the sample, accounting for around 17 percent of the LSI sector's assets.

JEL Code: C33, G21, Q54