Firm Credit Conditions and Flood Risk: Evidence from Ireland

Abstract

In this paper, we examine the impact of the risk of flooding on the credit conditions of nonfinancial corporations in Ireland. Using detailed maps of the likelihood of flood events and geolocated loan data from the AnaCredit dataset, we compare the interest rates and collateral requirements of borrowers with similar characteristics but different levels of flood risk. We find that loans to borrowers in flood risk areas (around 7 per cent of our sample) face an interest rate premium (of roughly 7 to 13 basis points) and are more likely to provide a collateral (between 3 and 7 percentage points). Furthermore, our estimates indicate that the increased flood risk caused by climate change is partially factored in. Although the results suggest that lenders price this important source of climate risk, they also highlight an additional difficulty in obtaining credit for borrowers located in areas susceptible to floods.