Chronic, acute heat reduce French SME loan growth
A Banque de France working paper finds that both chronic temperature increases and acute heat days significantly reduce loan growth to French micro and SME firms. The study, based on a 2010-2023 firm-bank panel, shows effects concentrated in medium- and long-term lending.
Heat's dual impact on credit supply
The study documents that both chronic warming and acute heat exposure significantly reduce loan growth, particularly for medium- and long-term credit.
However, the dynamics differ: acute heat shocks cause sharp but transitory contractions lasting up to five years, while chronic warming leads to more persistent adjustments, extending up to eight years.
This suggests a longer-horizon reassessment of firm risk by banks.
The aggregate response masks substantial heterogeneity across industries.
Trade, transport, accommodation, leisure, manufacturing, and mining sectors are vulnerable to both chronic warming and acute heat stress.
In contrast, real estate, construction, utilities, services, and ICT sectors respond more strongly to acute heat events.
These patterns align with diverse transmission channels linking temperature exposure to firm performance and, ultimately, to bank lending decisions.
Granular insights for policy
Physical climate risk increasingly affects firms' operating conditions, asset values, and borrowing capacity, making it salient for financial intermediation.
This paper addresses a knowledge gap by examining how banks adjust credit supply in response to temperature-related risks at a granular level.
Distinguishing between acute and chronic heat is crucial for prudential policy, as highlighted by the European Central Bank's (ECB) requirements for integrating climate-related risks into ICAAP.
International bodies like the IMF and BCBS also stress the importance of sectoral and geographic heterogeneity in climate-risk transmission, underscoring the need for granular evidence.
France, with its projected spatial heterogeneity in temperature increases, offers a valuable setting for this research.
Beyond standard risk models
The study highlights that temperature exposure constitutes an additional source of risk not yet fully captured by standard bank credit assessment models.
For policymakers and supervisors, these findings underscore the importance of climate-risk frameworks that are granular, sector-specific, and attentive to the maturity structure of lending.
This research is a crucial step towards integrating physical climate risks more effectively into financial supervision and portfolio monitoring practices.