New Faculty Seminar Series - Wenxia Ge

This paper examines the effects of extreme temperature-related climate risk on bank loan contracting terms. Using a sample of syndicated bank loans from 65 countries or jurisdictions from 2001 to 2019 and employing the annual average absolute sensitivity of stock return to temperature anomalies as a measure of climate risk, we find that climate risk has a negative impact on firm performance, and banks charge higher interest rates, use shorter loan maturity, and more likely use collaterals when lending to borrowers with higher climate risk. Our cross-sectional analyses reveal that borrowers’ climate risk disclosures mitigate the effects of climate risk on loan spread and the probability of using collaterals, and the borrowing cost of high-climate-risk borrowers is lower after their home countries adopt climate risk disclosure policies. We also find that banks with more past climate-risk-related lending experience are less likely to use collaterals for high-climate-risk borrowers.