Extreme weather and firm borrowing: Evidence from Brazil

This paper investigates how firms adjust their borrowing in response to extreme climate events. Using proprietary data from the Central Bank of Brazil that record all bank–firm credit relationships nationwide, we study changes in outstanding credit during the 30 most impactful natural disasters in 2020–2021. Our causal design compares affected and unaffected firms within the same industry and borrowing from the same bank. We find that affected firms increase their debt relative to unaffected ones. Disaggregated analyses show that this expansion is concentrated in short-term liquidity-linked products, such as working capital loans and receivables operations, while project financing declines. Our findings reveal two opposing forces through which climate disasters affect firm–bank credit relationships: an adjustment channel, where firms borrow adaptively to sustain operations and stakeholder ties, and a discouraged borrower channel, where heightened uncertainty leads firms to postpone long-term investment. • Firms hit by extreme weather increase their bank debt. • Study uses complete firm–bank credit data from Brazil. • Compares affected/unaffected firms in the same bank & industry. • Short-term, working capital loans see the largest increase. • Long-term project financing declines due to uncertainty.