Prepared by: Artur Mika - Expert in the Commercial Banking Department, UKNF

40.5°C: when the thermometer goes full tilt

On 28 June 2026, the Polish Institute of Meteorology and Water Management recorded 40.5°C in the town of Słubice, setting a new official record of the highest air temperature for Poland¹ . The previous record, 40.2°C, was recorded on 29 July 1921 in Prószków near Opole². 

The June heat wave in Poland reflects the trend observed almost all over Europe, being a continuation of the phenomenon recorded in May 2026. According to Copernicus Climate Change Service (C3S), May 2026 was the second warmest May globally and the seventh warmest May in Europe on record³. In the same period, large areas in western, central and eastern Europe also recorded drier than average weather conditions, with river flows clearly below normal levels: dry land gets warm quicker, exacerbating every new heat wave and water deficit. 

From banks’ perspective, these facts are not merely a meteorological curio but a real sign of materialisation of physical risk, being – next to transition risk – one of the two categories of climate risk. An essential fact in this context, when it comes to risk modelling, is that this is not an isolated weather anomaly but an element of a series of record temperatures.

Economy fever: how the heat hits real economy

There are several types of major transmission paths that transfer the risk of extreme temperatures to real economy, thus making it a systemic risk. The negative effect manifests itself as, for example, a temporary decline in labour productivity, especially in the construction sector, certain branches of the manufacturing[CH1.1] sector or in transport, i.e. in sectors with a high share of outdoor labour. This can cause delays in contract performance and higher labour costs, which in turn can deteriorate financial position of businesses which borrow money. Another example of a transmission channel for thermal shocks is agriculture. In the agricultural sector, periods of extraordinary heat triggering droughts play a role in reducing crops as well as in increasing livestock mortality and irrigation costs. These factors, in turn, affect negatively the situation of borrowers in the agricultural sector, both their creditworthiness and the quality of their loans. 

Additionally, by increasing food prices, the above-mentioned climate factors affect the level of inflation and, consequently, the monetary policy, including interest rates, and so also the cost and availability of loans. Another channel of transmission of the negative effect of hot weather on real economy is the energy sector. In this area, the effect can be seen as both higher demand for energy (especially for the purpose of using air conditioning) and a decline in sales (which involves, for example, interruptions of energy supplies). In this context, energy price spikes have an extra negative effect on borrowers. Extreme temperatures affect real economy also through accelerated degradation of the critical infrastructure, including transmission networks or road infrastructure. This leads to more public spending and creates a budgetary burden for central and local governments. Finally, heat waves cause problems for public health: higher rates of mortality and absence from work, reducing labour supply.

The negative ‘synergy effect’ of those factors can translate into a slower increase (or, in extreme cases, even decrease) in GDP or an increase in inflation (driven by rising food and energy prices due to intense heat). This is the real impact on the macroeconomic models used by banks.

When the bank’s balance sheet takes a knock from the heat

From the perspective of a credit institution, extreme temperatures materialise in traditional risk categories which, however, stem from climate risk.

In the realm of credit risk, for the reasons explained above, intense heat and droughts deteriorate the quality of banks’ exposures to entities in the real economy sectors, i.e. agriculture, energy, transport, construction. Reduction can also be seen in terms of the value of real properties serving as collateral, especially where the real property is exposed to overheating, fire, water deficit, which in turn can affect the LGD parameter and capital requirements.

High temperatures can also lead to higher operational risk, causing problems such as breakdown of cooling systems in data centres or disruptions in power supply, and therefore – a threat to banks’ business continuity. 

Meanwhile, in the area of market risk, heat waves may cause a Climate Minsky Moment⁴, i.e. a sudden collapse in the value of assets [CH2.1]caused by an unexpected change in investors’ expectations as to climate risks, resulting in a fire sale of the assets.

The impact of extreme temperatures can also materialise as an increase in liquidity risk. During heat waves, both retail and corporate clients may demonstrate increased demand for cash in the short term, which generates bank run pressure. What’s more, there can be more demand for credit facilities to cover cash flow gaps caused by disruptions in supply chains due to intense heat. 

Waves of extreme temperatures can also be a catalyst for an increase in banks’ reputational risk. In this respect, financial institutions should be constantly vigilant to avoid exposure to the risk of greenwashing. This risk can materialise, for example, when a bank is actively promoting its products as environmentally sustainable but also has high exposures to corporate clients, whose business materially intensifies adverse weather phenomena, including hot temperatures. High temperatures can act as a catalyst for those risks as heat waves amplify pro-climate activism and the sensitivity of the media to the financing of businesses causing high air temperatures.

Banks’ solution to heat waves 

There are measures that can be considered components of banks’ good management of climate risk related to high temperatures. Such measures include, in particular, the following ones:

1. Mapping of credit exposures by location and sector. What can be useful here are the so-called heat maps for loan portfolios. Heat maps aggregate data on the location of collateral and the clients’ business with climate-related data, including national (IMGW-PIB) and international, such as Copernicus Climate Data Store⁵. 
2. Inclusion of climate scenarios (concerning physical climate risk, including risk related to extreme temperatures) in banks’ internal stress tests and the ICAAP, including when using scenarios of the Network for Greening the Financial System⁶.
3. Inclusion of heat-related risks in the plans referred to in Article 76(2) of the CRD, i.e. in the plans taking into account risks arising from the transition to sustainable economy. The plans should consider the scenario of an accelerated, not gradual, materialisation of the risk of high temperatures, given the series of months with record temperatures persisting since 2023, as confirmed by the C3S.
4. Inclusion of climate parameters (such as thermal resistance of buildings, availability of water, the risk of overheating) in the valuation models for real properties used as collateral. 
5. Introduction and use of limits on sectoral and geographical concentration of exposures to industries and regions particularly exposed to extreme temperatures.
6. Increasing operational resilience, for example by incorporating heat wave scenarios in business continuity plans. 
7. A broader use of insurance instruments to secure banks’ own exposures to the risk of high temperatures, as well as promoting an appropriate level of insurance among banks’ clients.
8. Educational initiatives addressed to clients, especially in agriculture, and focused on the financing of irrigation systems, the cultivation of drought-resistant plant varieties or the use of thermal insulation for buildings.
9. Professional approach to ESG risk disclosures and reporting, covering physical climate risk, including thermal risk, which creates pressure to improve discipline in the market.

Banks that apply proper practices in managing ESG risks – including physical climate risk, which also includes the risk of extreme temperatures – will surely stand out as financial institutions demonstrating a significantly higher level of resilience.