Extreme Temperatures and Loan Defaults: Evidence from Bank-Firm Level Data in Mexico

Abstract

The frequency and intensity of extreme weather events are likely to increase as climate change unravels. Although there is a large literature documenting detrimental effects on economic activity, there is a lack of evidence on firms' responses to temperature extremes, particularly how their credit management and their ability to repay their existing debt are impacted. We fill this gap by exploiting an extraordinarily detailed data set containing loan-level information for the universe of loans extended by commercial banks to private firms in Mexico. We find that anomalous days of extreme temperature increase quarterly county-level rates of non-performing loans and that the results are driven mainly by excessive heat. The impact is concentrated on agricultural firms, but there is also a non-negligible impact on non-agriculture firms in sectors that are more dependent on local demand. Our results are consistent with general equilibrium effects originated in agriculture that expand to non-agriculture sectors in agricultural regions.