Working Paper: CEPR ID: DP17909
Authors: Filippo De Marco; Nicola Limodio
Abstract: This paper investigates how a climate shock affects the banking system. Our empirical strategy exploits El Nino, a recurring natural phenomenon producing quasi-random variation in temperatures across the US. We find that El Nino deteriorates the value of natural amenities in the affected counties, reducing house prices and mortgage lending. These local effects aggregate at the bank level and induce exposed banks to change their mortgage lending even in unaffected counties. We identify the characteristics of climate-resilient banks through a LASSO analysis and find that banks with lower operating leverage (expenses on physical premises) are less affected by climate shocks.
Keywords: banking; climate; financial stability
JEL Codes: G21; Q54; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| El Niño (Q54) | Deterioration of natural amenities (Q26) |
| Deterioration of natural amenities (Q26) | House prices (R31) |
| Deterioration of natural amenities (Q26) | Mortgage lending (G21) |
| House prices (R31) | Mortgage lending (G21) |
| El Niño (Q54) | Mortgage lending (G21) |
| El Niño (Q54) | House prices (R31) |
| Natural amenities (Q26) | Impact of El Niño on mortgage lending (G21) |
| Bank characteristics (G21) | Impact of climate shocks on mortgage lending (G21) |