The Bank of Italy published research assessing how climate-related physical risks affect the one-year probability of default (PD) of Italian non-financial firms, focusing on hydrogeological hazards such as floods and landslides. The paper develops a firm-level hydrogeological risk indicator and a hydrogeological risk-adjusted PD that incorporates expected losses from these hazards into firms’ financial statement items. Using a dataset that combines firms’ financial data with the geolocation of operational units matched to hazard levels, the analysis finds that 38 per cent of firms are exposed to hydrogeological risks, with material regional and sectoral differences. On average, exposure is associated with a small increase in PD and limited economic impact, with negligible effects on collateral used in monetary policy operations, while firms in high-risk areas face a larger deterioration in creditworthiness. Insurance coverage mitigates the effect across the sample, reducing the PD impact by half on average, although the paper notes that more frequent and severe extreme events could amplify negative effects on firms’ credit profiles.
Bank of Italy 2026-02-25
Bank of Italy study finds 38 per cent of Italian firms exposed to hydrogeological risks and insurance halves the probability of default impact
The Bank of Italy's research evaluates the impact of climate-related physical risks, like floods and landslides, on the one-year probability of default (PD) for Italian non-financial firms. The study introduces a hydrogeological risk indicator and finds 38% of firms are exposed to these risks, with regional and sectoral variations. While insurance coverage mitigates PD impacts, firms in high-risk areas experience greater creditworthiness deterioration.