A climate stress testing exercise on loans to European small and medium enterprises

This paper assesses the impact of floods on credit to European small and medium-sized enterprises (SMEs) using a discrete-time survival model. The authors find a statistically significant relationship between the default probability of loans to SMEs and floods occurring in the region where the firm is located.

The authors propose a micro-level stress testing exercise to assess the performance of small business loans under different climate scenarios. Their results allow us to identify the European regions with heightened vulnerability under a stressed climate scenario and to quantify the impacts upon individual firms in terms of increases in loan default probability.