In a new blog post, the Bank of France presents research linking extreme heat and sustained warming to slower bank lending growth for French small and medium enterprises (SMEs). Chronic warming is associated with a larger, more persistent slowdown than episodes of extreme heat. The findings suggest banks should incorporate more granular assessments of future climate exposure into credit analysis and portfolio monitoring, as conventional financial ratings may not fully capture these risks. The study combines local temperature data with business locations and credit register records for 2010–23, focusing on SMEs with a single establishment and comparing similar local businesses to isolate credit supply effects. For the most severe 10% of acute exposures, measured by increases in days above 35 degrees Celsius, credit growth falls by an average of 4.4 percentage points, with effects potentially lasting five years. Comparably severe increases in annual average temperatures are associated with a decline of about 5.2 percentage points lasting up to eight years. These estimates capture the net effect of lending reductions linked to perceived risks and additional financing for adaptation investments, with the negative effect dominating over the period studied. In some sectors, banks reduce lending at medium and long maturities more sharply than short maturities. Exposure also differs geographically, with chronic warming more pronounced in northern and eastern mainland France and increases in extreme heat concentrated in central and southern areas. Lending to manufacturing and mining appears sensitive to both risks, while construction and real estate are more affected by acute episodes. Accounting for borrowers’ credit ratings leaves the estimated temperature effects virtually unchanged, suggesting historical financial indicators alone may be insufficient to assess future climate risk.
Bank of France study links rising temperatures to slower lending growth for French small and medium enterprises
A Bank of France blog post presents research linking heat exposure to weaker lending growth for French small and medium enterprises. For the most severe exposures, extreme heat is associated with a 4.4 percentage point reduction in credit growth lasting up to five years, compared with 5.2 percentage points for up to eight years under chronic warming. Differences across locations and sectors, together with effects not fully captured by credit ratings, support more granular climate risk assessments in lending and portfolio monitoring.