Wildfires blazing in Australia

 This paper shows a negative correlation between banks’ willingness to lend and recent local abnormal hot temperature occurrences, suggesting that banks factor market-level information into their lending decisions. The aggregate credit flow from banks to small farms in a county reduces by 2.4 to 4.5 percent following a standard deviation increase in abnormally hot temperatures. With increased climate risk, geographically dispersed banks (with a branch presence in many counties), multi-state banks, and larger banks appear to reduce lending relatively more than their geographically and operationally more constrained counterparts. Our result suggests that banks manage exacerbated climate risk pre-emptively.