Climate, Amenities and Banking: El Niño in the US

Authors: Filippo De Marco, Nicola Limodio

Abstract

This paper investigates how a climate shock affects the banking system. Our empirical strategy exploits El Niño, a recurring natural phenomenon producing quasi-random variation in temperatures across the US. We find that El Niño deteriorates the value of natural amenities in the affected counties, reducing house prices and mortgage lending. These local effects aggregate at the bank level and induce exposed banks to change their mortgage lending even in unaffected counties. We identify the characteristics of climate-resilient banks through a LASSO analysis and find that banks with lower operating leverage (i.e. lower expenses on physical premises) are less affected by climate shocks.