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A climate stress testing exercise on loans to European small and medium enterprises
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Zhenghong Ding ,
Luca Barbaglia ,
Raffaella Calabrese ,
Serena Fatica
Energy Economics, Volume: 155, Start page: 109177
Swansea University Author:
Zhenghong Ding
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© 2026 The Authors. This is an open access article distributed under the terms of the Creative Commons CC-BY license.
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DOI (Published version): 10.1016/j.eneco.2026.109177
Abstract
We develop a micro-level climate stress testing framework to evaluate the financial performance of small business loans under diverse climate scenarios. Focusing on European small and medium-sized enterprises (SMEs), we estimate the impact of coastal, flash, and river floods on loan default risk usi...
| Published in: | Energy Economics |
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| ISSN: | 0140-9883 1873-6181 |
| Published: |
Elsevier BV
2026
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| Online Access: |
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| URI: | https://cronfa.swan.ac.uk/Record/cronfa71420 |
| Abstract: |
We develop a micro-level climate stress testing framework to evaluate the financial performance of small business loans under diverse climate scenarios. Focusing on European small and medium-sized enterprises (SMEs), we estimate the impact of coastal, flash, and river floods on loan default risk using a discrete-time survival model. Our analysis reveals that flood events significantly increase SME loan default probabilities in countries such as Spain and France. However, this effect is notably reduced in regions with strong infrastructure or effective support mechanisms. To complement the empirical findings, we conduct a forward-looking stress testing exercise that projects default probability trajectories under varying flood severity scenarios. This approach enables financial institutions and regulators to quantify the loan-level credit risk associated with climate-related flooding, offering valuable insights for risk management and policy design. |
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| Keywords: |
Climate change; Loan default; Natural disasters; Risk modelling; Stress testing |
| College: |
Faculty of Humanities and Social Sciences |
| Funders: |
Raffaella Calabrese was supported by Economic and Social Research Council [grant number ES/W010259/1]. |
| Start Page: |
109177 |