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.
Wenxia Ge is an associate professor of accounting at the Telfer School of Management. She is Associate Editor of both the Asian Review of Accounting and the Asia-Pacific Journal of Accounting & Economics and a member of the editorial boards of Advances in Accounting and the Journal of International Accounting, Auditing and Taxation. Her research has been published or accepted for publication in journals such as Auditing: A Journal of Practice & Theory, Journal of Accounting and Public Policy, Journal of Business Finance & Accounting, Journal of Business Research, Journal of Corporate Finance, Journal of Empirical Finance, and Journal of International Business Studies.