Flooding and Financial Risk: Assessing the Impact on SME Loans in Italy. A Survival Analysis Study

Abstract

This study examines the impact of flooding events on loan defaults among Italian Small and Medium Enterprises (SMEs) using survival analysis techniques. Employing extended Cox models with time-varying covariates and random effects, the research analyzes data from the European DataWarehouse and GloFAS datasets spanning 2004 to 2023. The findings reveal a significant association between increased flooding events and higher likelihood of loan defaults, with small enterprises and specific sectors such as water supply and real estate being particularly vulnerable. Models incorporating the floodiness index demonstrate greater explanatory power, emphasizing the importance of integrating climate risks into credit assessments and highlighting the need for enhanced financial resilience strategies among SMEs in flood-prone areas.