The rising tide lifts some interest rates - climate change, natural disasters, and loan pricing

Oct 22, 2026

Uploaded by aboduw

Investigates how corporate loan costs respond to climate change-related natural disasters. Builds granular borrower exposure measures and separates direct disaster impacts from lender belief updates about future disaster effects. Finds that after a climate change-disaster, loan spreads for at-risk but unaﬀected borrowers rise sharply, especially when attention to climate change is high, with the weakest borrowers facing the largest spread increases. No comparable effect appears for disasters not worsened by climate change.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages56

Reading Time2 h 21 min

AccessFree to download

Abstract

Introduction

Climate change risks and financial markets

Motivation for examining loan market pricing

Board of Governors of the Federal Reserve System International Finance Discussion Papers ISSN 1073-2500 (Print) ISSN 2767-4509 (Online) Number 1345 June 2022 The rising tide lifts some interest rates: climate change, natural disasters, and loan pricing Ricardo Correa, Ai He, Christoph Herpfer, and Ugur Lel Please cite this paper as: Correa, Ricardo, Ai He, Christoph Herpfer, and Ugur Lel (2022) . \The rising tide lifts some interest rates: climate change, natural disasters, and loan pricing," International Finance Discussion Papers 1345 . Washington: Board of Governors of the Federal Reserve System, [https://doi.org/10.17016/IFDP.2022.1345](https://doi.org/10.17016/IFDP.2022.1345) . NOTE: International Finance Discussion Papers (IFDPs) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research sta􀀋 or the Board of Governors. References in publications to the International Finance Discussion Papers Series (other than acknowledgement) should be cleared with the author(s) to protect the tentative character of these papers. Recent IFDPs are available on the Web [at www.federalreserve.gov/pubs/ifdp/. This](at www.federalreserve.gov/pubs/ifdp/. This) paper can be downloaded without charge from the Social Science Research Network electronic library [at www.ssrn.com](at www.ssrn.com). The rising tide lifts some interest rates: climate change, natural disasters, and loan pricing * Ricardo Correa† Ai He‡ Christoph Herpfer§ Ugur Lel¶ May 15, 2022 Abstract We investigate how corporate loan costs are aﬀected by climate change-related natural disasters. We construct granular measures of borrowers’ exposure to natural disasters and then disentangle the direct eﬀects of disasters from the eﬀects of lenders updating their beliefs about the impact of future disasters. Following a climate change-related disaster, spreads on loans of at-risk, yet unaﬀected borrowers, spike and are ampliﬁed when attention to climate change is high. Weaker borrowers with the most extreme exposure to these disasters suﬀer the highest increase in spreads. Importantly, there is no such eﬀect from disasters that are not aggravated by climate change. JEL Classiﬁcations: G21, Q51, Q54 Keywords: Banks, climate change, loan pricing, natural disasters ∗We thank Brigitte Roth Tran and Mathias Kruttli for helpful suggestions and for sharing the code to map NETS to Compustat. We would also like to thank David Aikman, Mark Carey, Alain Chaboud, Yongqiang Chu, John Cochrane, Erik Gilje, Matthew Gustafson, Kristine Hankins, Victoria Ivashina, Lilian Ng, Steven Ongena, Toan Phan, Christoph Schiller, Mike Schwert, Roger White, Yun Zhu, and seminar and conference participants at the NBER Summer Institute, the European Finance Association annual meeting, the Northern Finance Association annual meeting, the Wharton Conference on Climate and Commodities, the Pre-WFA Early Career Women in Finance Conference, Qatar Center for Global Banking and Finance, the FDIC/JFSR Bank Research Conference, the IBEFA Summer Meeting, European Commission Summer School on Sustainable Finance, De Nederlandsche Bank (DNB), UCLA Climate Adaptation Research Symposium, University of South Carolina, Emory University, Federal Reserve Board, University of North Carolina at Charlotte, University of Virginia (Darden), Southwestern University of Finance and Economics (China), the BOCA Corporate inance conference, the Midwest Finance Association annual meeting, Paris December Finance Meeting, and the Eastern Finance Association meeting. The views in this paper are solely the responsibility of the authors and should not be interpreted as reﬂecting the views of the Board of Governors of the Federal Reserve System or any other person associated with the Federal Reserve System. All remaining errors are our own. †Federal Reserve B

FAQs

How do climate change-related natural disasters affect corporate loan costs?

They increase loan spreads for borrowers who are at-risk but not directly affected after such disasters, particularly when climate change attention is high.

What does the paper separate in its analysis of loan pricing?

It disentangles the direct effects of disasters from the effects of lenders updating their beliefs about the impact of future disasters.

Do disasters that are not aggravated by climate change have a similar impact?

No. The paper reports no comparable loan-spread effect from disasters not aggravated by climate change.

Oct 22, 2026

Uploaded by aboduw