When disasters strike

: climate risk, bank lending dynamics and the spillover effects

Abstract

This thesis investigates how banks adjust their lending dynamics to U.S. firms in response to climate-related disasters, focusing on post-disaster credit reallocation and portfolio rebalancing. Using syndicated loans from DealScan and disaster loss data from SHELDUS, the study analyzes banks' strategic shifts in credit supply and pricing mechanisms following extreme weather events. The findings reveal that banks reduce credit supply at the extensive margin while increasing loan pricing (spreads) in disaster-affected regions. At the intensive margin, loan-level analysis shows that banks initially raise interest rates for affected borrowers but later reduce them and expand credit as economic conditions stabilize. This suggests that banks prioritize pricing mechanisms before adjusting non-pricing loan terms when issuing new contracts. Following natural disasters, banks reallocate capital by shifting credit away from high-risk areas to neighboring states, which serve as financial buffers by absorbing increased credit demand while mitigating risk exposure. However, at the contractual level, this effect is absorbed. In unaffected states, a persistent decline in credit supply at both the state and loan levels reinforces the robustness of these findings and highlights the systematic nature of credit reallocation. Banks strategically redirect resources toward higher-demand regions while preserving liquidity through shorter maturities. Additionally, banks exhibit selection bias, initially raising borrowing costs for large, high-quality and profitable firms to subsidize lower rates for riskier borrowers. Over time, this strategy reverses, as banks lower spreads for financially stronger firms and expand credit to businesses that demonstrate resilience post-disaster.

Date of Award	29 Apr 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Sujiao Zhao (Supervisor)