Tinbergen Institute
We study whether exposure to climate risk affects banks’ mortgage-lending decisions. Using detailed wildfire hazard and occurrence data in Portugal, we find evidence that banks charge higher risk premiums for mortgages originating in at-risk but not directly affected areas. This result is established by exploiting the variation in mortgage pricing within very granular bins of mortgages and debtors with similar characteristics, which are differentially exposed to wildfire risk. We investigate whether monetary policy affects the pricing of climate risk. We find that when monetary policy tightens, the climate risk premium increases.