- Banks •
- climate change •
- loan pricing •
- Natural disasters
Banks price physical climate change-related risks after observing natural disasters linked to climate change. We isolate this updating process by identifying loans to borrowers at risk of, but not-directly affected by, climate change-related disasters.
Loan spreads for these borrowers spike in both primary and secondary markets following such disasters and banks adjust internal probabilities of default, consistent with higher perceived credit risk. However, we also find evidence of overreaction due to salience, as the change in spreads is short-lived and amplified by media attention. This salience is associated solely with climate change-related disasters and impacts investment decisions at bank-dependent firms.