DiD coefficient is 0.6 for the total NPLs, and 3.71 and 1.04 for nonfinancial corporation and household NPLs, respectively.

To learn more about the time dynamics of NPLs and as a further robustness test for our analysis, we implement a panel event study. The visual representation of our results is in Figure 6. Before the disaster took place, there were no statistically significant differences between the trends of the two sets of provinces. Post disaster NPLs in the affected provinces start to diverge from their counterfactuals at the fourth quarter after the event, reaching a maximum of 1.43 percentage points for the total credit portfolio and 2.52 for the nonfinancial corporate credit portfolio. In the fifth quarter, NPLs start to decline, fading the differences between the two groups. In the seventh quarter, the effect on NPLs is statistically equal to zero. This progressive reaction is expected as NPLs are a slow-moving indicator only recorded when payments are overdue by (usually) more than 90 days.

The higher proportion of borrowers not able to meet their payment obligations suggest insufficient protection against natural disasters in the LAC region. For instance, following the 2018 drought, the production of soy and corn in Argentina dropped by 31.3 percent and 12.5 percent, respectively (Central Bank of Argentina 2018). In the absence of a developed insurance market that can assist in smoothing such negative shocks, firms' profit margins are expected to be substantially hit, hindering their ability to honor the loan payments. In that regard, whereas the depth of the insurance market in LAC (insurance premiums as percentage of the GDP) is higher than in most regions, it is significantly lagging behind high income countries.<sup>32</sup> For example, in France, one of the high-income countries with higher insurance penetration, a recent survey on the preparedness for climate change shows that physical risks appear to be modest in the short term as these risks are covered by insurance companies (ACPR 2019).

Our empirical results are in line with the findings of similar studies. Directly comparable with our outcomes, an IMF report shows that natural disasters contribute to a deterioration in NPLs in Sub-Saharan Africa, which is up to 1 percentage point in the case of storms (IMF 2016). The Central Bank of Mexico undertook a more granular analysis than the one carried out in our paper by analyzing the effect of the exposure to unusual extreme heat events on the delinquency rate of small, micro, and medium enterprises in the Mexican agriculture sector (Central Bank of Mexico 2020). This analysis finds evidence of an increase in NPLs of 1 percentage point following a 20 days of unusual extreme heat wave during a given trimester. In a developed country-setting, Noth and Schüwer (2018) document that natural disasters significantly weaken the stability of US banks with business activities in regions affected by natural disasters, reflected, among others, in higher NPLs. Moreover, Gallagher and Hartley (2017) show evidence that four quarters after the Katrina Hurricane hit New Orleans, there is a 2.5 percentage point increase in the share of residents in flooded areas with at least one NPL account.

> 32 Measured as life and non-life insurance premiums as a percentage of the GDP, the depth of the LAC insurance market is above most regions at 1.8 percent of the GDP, only slightly surpassed by the East Asia and Pacific region. Nonetheless, the LAC insurance market is shallower when compared with high-income countries, where the insurance premiums represent 4.9 percent of the GDP. In addition, there is significant heterogeneity across LAC economies, where the indicator varies from 1 percent in Paraguay to 4.5 percent of GDP in Chile.

17