Effects of climate on bank default

Abstract

Developing countries are more vulnerable to the consequences of climate change. The access to credit has been highlighted as crucial to the investment in adaptation strategies and to build resilient economies, but bank lending behavior in response to climatic shocks is still not well understood. The demand for credit is expected to increase in periods of extreme climate events, but loan delinquency rates would likely go up as well. In recent decades, Brazil has already experienced unusual climate variability with severe droughts in the Northeastern region, the most populous semiarid area in the world. The Bank of the Northeast (BNB), a public bank that has been used to implement local development policies, has lent over US$ 20 billion since the earmarking of funds for regional development in the Constitution of 1988. This study examines the impact of climatic shocks on the BNB’s credit operations and delinquency rates when several climatic events occurred over the period of 2002-2013. The econometric regressions method was used with fixed-effects panel data and its estimates indicate that deviations of temperature and precipitation from their annual mean increased default rates considerably. One of the factors that affects bank defaults may be the reduction in agricultural production, since default rates are higher in this sector, which suffers from the income reduction of producers whom are affected by these climate variations.