Proposed Title of Workshop:

Integrated Finance and Climate Risk

Organizer:

UNSW Business School

Keywords:

• Mortgage Lending
• Loan Performance
• Climate Risk

Workshop Chair:

Dr. Kristle Romero Cortés

Personal Bio:

Dr. Kristle Cortés is an Associate Professor in the School of Banking and Finance in the Business School at the University of New South Wales. Her research interests include financial intermediation, empirical corporate finance, entrepreneurial finance, and the structure, optimization, and regulatory practices of the financial services industry. Dr. Cortés previously worked for the Federal Reserve Bank of Cleveland where, in addition to her research, she took part in the Federal Open Market Committee process. Her work has been published in the Journal of Financial Economics, The Review of Economics and Statistics and The Review of Corporate Finance Studies. Dr. Cortés has a PhD in finance from Boston College and a BA in economics and philosophy from Northwestern University.

Workshop Committee Members:

Dr. Kristle Romero Cortés; UNSW Business School

Dr. Cara Vansteenkiste; UNSW Business School

Dr. Helena Bang; UNSW Business School

Date:

July 27, 2023

Venue:

UNSW Business School

Description:

Background and Goal

There are many documented benefits of financial integration. However, the risks are lesser known, if any. Financial integration is essential because it allows excess capital to flow to areas with higher needs. However, it is unclear what impact that has over long periods or across large regions.

For example, the financial situation of a region will change over time, and it is important that the financial institutions responsible for providing credit can respond to the increased demand. Additionally, banks monitor the borrowers and loans after the lending decision has been made. This increased interaction with financial services can lead to new opportunities and additional access to credit which can aid in the economy's growth.

However, it is important to understand that financial institutions have limited access to funding, so the decisions regarding where to invest often include decisions regarding where to disinvest.

This study aims to study banks' internal lending networks in response to a shock to credit demand. Specifically, it will focus on bank lending in regions that are not affected by the physical shock of the disaster, however, are connected via their banking network to those affected areas. This alleviates the concerns around the effects caused by the disaster itself and highlights only the outcomes of the spillover effects of the shock across financial systems.

While climate risk is typically highlighted in areas prone to natural disasters, the spillover effects have ramifications for financially connected but unaffected regions. While the increase in demand in the affected area is well documented and understood, the availability of funding and the internal decision-making of the banks involved is paramount to understanding how the new lending can occur prudently.

The results from this project will inform and improve bank lending and aim to alleviate uncertainty for both borrowers and lenders. Furthermore, by explaining the strategies banks use to meet unexpected demand after a natural disaster, we can better understand how banks operate both in a crisis and in regular times.

Scope and Information for participants

Our results can also help regulators and commercial banks alike plan for climate events and normalize lending strategies that incorporate climate risk. This is because it is common for regulators to need to understand how to alleviate issues for the next potential problem best. And since it is difficult to predict exactly what that issue will be, it is helpful to understand the internal decision-making process regarding shocks. And those lessons can then be applied to other areas. This means that the shock becomes less of an issue. The regulator or other critical economic players can support the financial system accordingly without having to plan every detail with limited information.

By being better informed about internal lending strategies, financial intermediaries across different industries can make better investment decisions since the financial networks in developed economies often rely on each other.

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