The credit channel of acute vs chronic climate change-related risk

This working paper (No. 1048) investigates how banks adjust credit supply in response to temperature-related climate risk, using a firm-bank level panel of French single-establishment micro and SME firms from 2010 to 2023. Combining station-level temperature data from Météo-France with geocoded firm information, the study distinguishes between two dimensions of temperature exposure — chronic warming (gradual average temperature increases) and acute heat events (days above 35°C) — to examine their differential impact on banks' loan growth, particularly medium- and long-term lending, at a finer geographic resolution than prior literature.

The study's key findings reveal that both chronic and acute temperature shocks significantly reduce loan growth, but with markedly different dynamics: acute heat shocks cause sharp but transitory lending contractions lasting up to five years at high exposure levels, while chronic warming triggers more persistent adjustments lasting up to eight years, suggesting banks conduct a longer-horizon reassessment of firm risk. The effects also vary substantially by sector — trade, transport, accommodation, leisure, manufacturing, and mining are vulnerable to both shock types, while real estate, construction, utilities, services, and ICT are more strongly affected by acute heat specifically — and in some cases banks respond by shortening loan maturities rather than withdrawing credit entirely. These results, robust even after controlling for credit ratings, indicate that temperature exposure represents a distinct risk factor not yet captured by standard credit assessment models, underscoring the need for climate-risk frameworks that are granular, sector-specific, and attentive to lending maturity structures.