Thermal stress and financial distress: Extreme temperatures and firms’ loan defaults in Mexico

Abstract

The frequency and intensity of extreme temperature events are likely to increase with climate change. Using a detailed dataset containing information on the universe of loans extended by commercial banks to private firms in Mexico, we examine the relationship between extreme temperatures and credit performance. We find that unusually hot days increase delinquency rates, primarily affecting the agricultural sector, but also non-agricultural industries that rely heavily on local demand. Our results are consistent with general equilibrium effects originated in agriculture that expand to other sectors in agricultural regions. Additionally, following a temperature shock, affected firms face increased challenges in accessing credit, pay higher interest rates, and provide more collateral, indicating a tightening of credit during financial distress.