Borrowers under water! Rare disasters, regional banks, and recovery lending

Noth F., Rehbein O.

We investigate firm outcomes after a major flood in Germany in 2013. We robustly find that firms located in the disaster regions have significantly higher turnover, lower leverage, and higher cash in the period after 2013. We provide evidence that the effects stem from firms that already experienced a similar major disaster in 2002. Overall, our results document a positive net effect on firm performance in the direct aftermath of a natural disaster.

Popov A., Rocholl J.

We study the impact of exogenous funding shocks to German savings banks during the U.S. subprime mortgage crisis on the labor decisions of 30,000 + private and public firms in Germany. We find that firms with credit relationships with affected banks experience a significant decline in labor demand relative to firms with credit relationships with healthy banks, manifested in a simultaneous reduction in firm-level employment and average wages. The employment effect is more pronounced in larger firms, while the wage effect is stronger in smaller firms. Both employment and wages go back to pre-shock levels three years after the shock.

Schüwer U., Lambert C., Noth F.

This paper explores how banks react to an exogenous shock caused by Hurricane Katrina in 2005, and how the structure of the banking system affects economic development following the shock. Independent banks based in the disaster areas increase their risk-based capital ratios after the hurricane, while those that are part of a bank holding company on average do not. The effect on independent banks mainly comes from the subgroup of highly capitalized banks. These independent and highly capitalized banks increase their holdings in government securities and reduce their total loan exposures to non-financial firms, while also increasing new lending to these firms. With regard to local economic development, affected counties with a relatively large share of independent banks and relatively high average bank capital ratios show higher economic growth than other affected counties following the catastrophic event.

Huber K.

Lending cuts by banks directly affect the firms borrowing from them, but also indirectly depress economic activity in the regions in which they operate. This paper moves beyond firm-level studies by estimating the effects of an exogenous lending cut by a large German bank on firms and counties. I construct an instrument for regional exposure to the lending cut based on a historic, postwar breakup of the bank. I present evidence that the lending cut affected firms independently of their banking relationships, through lower aggregate demand and agglomeration spillovers in counties exposed to the lending cut. Output and employment remained persistently low even after bank lending had normalized. Innovation and productivity fell, consistent with the persistent effects. (JEL E32, E44, G01, G21, G32, R11, R23)

Breuer M., Hombach K., Müller M.A.

We examine the effects of financial reporting regulation on firms’ banking. Exploiting discontinuous public disclosure and auditing requirements assigned to otherwise similar small and medium-sized private firms, we document that financial reporting regulation reduces firms’ reliance on concentrated and local bank relationships and increases banks’ reliance on firms’ financial reporting, consistent with a shift in firms’ banking from relationship toward transactional approaches. Our evidence suggests that financial reporting regulation substitutes for banks’ information production role by burdening firms with the disclosure and auditing of their financial statements, consistent with institutional complementarities between reporting and banking systems. Received October 21, 2016; editorial decision September 15, 2017 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University PressWeb site next to the link to the final published paper online.

Cortés K.R., Strahan P.E.

Multi-market banks reallocate capital when local credit demand increases after natural disasters. Using property damage as an instrument for lending growth, we find credit in unaffected but connected markets declines by a little less than 50 cents per dollar of additional lending in shocked areas. However, banks shield their core markets because most of the decline comes from loans in areas where banks do not own branches. Moreover, banks increase sales of more-liquid loans and they bid up the rate on deposits in the connected markets. These actions help lessen the impact of the demand shock on credit supply.

Lambert C., Noth F., Schüwer U.

This paper tests whether an increase in insured deposits causes banks to become more risky. We use variation introduced by the U.S. Emergency Economic Stabilization Act in October 2008, which increased the deposit insurance coverage from $100,000 to $250,000 per depositor and bank. For some banks, the amount of insured deposits increased significantly; for others, it was a minor change. Our analysis shows that the more affected banks increase their investments in risky commercial real estate loans and become more risky relative to unaffected banks following the change. This effect is most distinct for affected banks that are low capitalized.

Gormley T.A., Matsa D.A.

This article examines managers’ incentive to play it safe. We find that, after managers are insulated by the adoption of an antitakeover law, they take value-destroying actions that reduce their firms’ stock volatility and risk of distress. To illustrate one such action, we show that managers undertake diversifying acquisitions that target firms likely to reduce risk, have negative announcement returns, and are concentrated among firms with managers who gain the most from reducing risk. Our findings suggest that instruments typically used to motivate managers, such as greater financial leverage and larger ownership stakes, exacerbate risk-related agency challenges.

Chavaz M.

BERROSPIDE J.M., BLACK L.K., KEETON W.R.

Thieken A.H., Bessel T., Kienzler S., Kreibich H., Müller M., Pisi S., Schröter K.

Abstract. In June 2013, widespread flooding and consequent damage and losses occurred in Central Europe, especially in Germany. This paper explores what data are available to investigate the adverse impacts of the event, what kind of information can be retrieved from these data and how well data and information fulfil requirements that were recently proposed for disaster reporting on the European and international levels. In accordance with the European Floods Directive (2007/60/EC), impacts on human health, economic activities (and assets), cultural heritage and the environment are described on the national and sub-national scale. Information from governmental reports is complemented by communications on traffic disruptions and surveys of flood-affected residents and companies. Overall, the impacts of the flood event in 2013 were manifold. The study reveals that flood-affected residents suffered from a large range of impacts, among which mental health and supply problems were perceived more seriously than financial losses. The most frequent damage type among affected companies was business interruption. This demonstrates that the current scientific focus on direct (financial) damage is insufficient to describe the overall impacts and severity of flood events. The case further demonstrates that procedures and standards for impact data collection in Germany are widely missing. Present impact data in Germany are fragmentary, heterogeneous, incomplete and difficult to access. In order to fulfil, for example, the monitoring and reporting requirements of the Sendai Framework for Disaster Risk Reduction 2015–2030 that was adopted in March 2015 in Sendai, Japan, more efforts on impact data collection are needed.

Schröter K., Kunz M., Elmer F., Mühr B., Merz B.

Abstract. The summer flood of 2013 set a new record for large-scale floods in Germany for at least the last 60 years. In this paper we analyse the key hydro-meteorological factors using extreme value statistics as well as aggregated severity indices. For the long-term classification of the recent flood we draw comparisons to a set of past large-scale flood events in Germany, notably the high-impact summer floods from August 2002 and July 1954. Our analysis shows that the combination of extreme initial wetness at the national scale – caused by a pronounced precipitation anomaly in the month of May 2013 – and strong, but not extraordinary event precipitation were the key drivers for this exceptional flood event. This provides additional insights into the importance of catchment wetness for high return period floods on a large scale. The database compiled and the methodological developments provide a consistent framework for the rapid evaluation of future floods.

Cortes K.

Behr P., Norden L., Noth F.

We investigate whether and how financial constraints of private firms depend on bank lending behavior. Bank lending behavior, especially its scale, scope and timing, is largely driven by bank business models which differ between privately owned and state-owned banks. Using a unique dataset on private small and medium-sized enterprises (SMEs) we find that an increase in relative borrowings from local state-owned banks significantly reduces firms’ financial constraints, while there is no such effect for privately owned banks. Improved credit availability and private information production are the main channels that explain our result. We also show that the lending behavior of local state-owned banks can be sustainable because it is less cyclical and neither leads to more risk taking nor underperformance.

Berg G., Schrader J.

This paper analyzes the effect of unpredictable aggregate shocks on loan demand and access to credit by combining client-level information from an Ecuadorian microfinance institution with geophysical data on natural disasters, more specifically volcanic eruptions. The results of this ‘natural experiment’ show that while credit demand increases due to volcanic activity, access to credit is restricted. Yet, we also find that bank-borrower relationships can lower these lending restrictions and that clients who are known to the institution are about equally likely to receive loans after volcanic eruptions occurred.

Duanmu J., Li Y., Tahsin S., Xu J.

Liu T.

Bellia M., Di Girolamo E.F., Pagano A.

Uesugi I., Miyakawa D., Hosono K., Ono A., Uchida H.

Kowalewski O., Brei M., Spiewanowski P., Strobl E.

Lee S., Alam M.Z.

AbstractThis study investigates the impact of climate change-induced risk on bank profitability in the G7 countries from 2001 to 2022. Using dynamic panel GMM estimation to analyse banking industry data with climate risk factors, we find that climate risk has a negative effect on bank profitability. The study also demonstrates that bank liquidity creation plays a key role in transmitting the adverse impact of climate risk on bank profitability. Additionally, the results of the study are robust and withstand different measures of bank liquidity creation. Furthermore, our empirical findings indicate that the influence of climate risk factors is consistent, even for banks primarily focussed on the insurance business. These findings suggest that policymakers may need to implement climate risk management policies to mitigate the detrimental effects of climate change on the banking sector.

Choi C., Zhang Y., Hummel M., Qian Q.

This study re-evaluates the economic impacts of Hurricane Harvey on Texas by utilizing both data-driven analyses and survey study. The results differ based on the data and methodologies employed. County-level data analyses suggest no significant difference in the hurricane’s effect between ‘affected’ and ‘unaffected’ counties in Texas. More granular analyses at the Census tract level, however, show a positive economic impact on Jefferson County, likely due to an influx of external funds for recovery and relief efforts. Furthermore, there is strong evidence that Hurricane Harvey’s impacts vary significantly among Census tracts within the same county, in particular along socioeconomic lines. Recovery was slower in tracts with higher proportions of populations in poverty or Supplemental Nutrition Assistance Program recipients. This disproportionate impact was also confirmed by our household survey conducted in the City of Beaumont. Aggregate data analyses tend to obscure these disproportionate impacts, thereby failing to accurately represent the adverse effects on socially vulnerable communities. Our findings highlight the crucial need for policies that address the disproportionate impacts on socioeconomically disadvantaged communities.

Sonpatki R., Kathuria A.

The 21st century has earned the tragic sobriquet “The Century of Disasters” due to the escalating frequency, complexity, and severity of both natural and human-made calamities. Climate change, marked by an increasing frequency and severity of natural disasters, necessitates a paradigm shift for businesses operations, urging a transition from reactive to proactive and resilient strategies. Research in this area has become crucial, offering organizations vital insights to better prepare for and mitigate the impacts of future disasters. This chapter delves into the multifaceted impact of natural disasters on businesses, exploring how different disciplines are rising to meet these unique challenges. Key findings emphasize the need for flexible supply chains, robust disaster preparedness, and innovative financing mechanisms to mitigate risks and ensure business continuity. As the business landscape becomes increasingly shaped by the realities of disaster risk, it is clear that an interdisciplinary approach is essential. This chapter offers insights from the convergence of literature from Operations Management, Finance, Marketing, and Information Systems. Together, these findings offer a comprehensive framework for understanding and mitigating the complex challenges that disasters present. Pertinently, this chapter explores the burgeoning field of IS in disaster management, highlighting its critical role in saving lives, protecting assets, and building more resilient communities. While this discourse demonstrates the growing importance of IS in disaster management, a number of critical questions remain unanswered. These pave the way for future research opportunities, which are presented at the conclusion of this chapter.

Ahn S.J., Gam Y.K.

Trinh H.H., Tran T.P.

Peters V.

AbstractNatural hazard shocks (such as natural disasters, extreme weather events, and climate shocks) have significant negative consequences for real economic activity. The banking sector can mitigate (or exacerbate) some of these consequences. This paper reviews the recent empirical literature on how banks are affected by such shocks, and how banks mediate the economic consequences to households and the real economy. After conceptualizing the theoretical transmission channels between the real economy and the banking sector, the review proceeds in two steps. First, it synthesises the existing literature on the direct effects of natural hazard shocks on bank stability, bank profitability, and credit supply. Then, the critical role of banking in economic recovery is analysed, including research on spillovers into unaffected regions through the banking system. Negative direct effects of natural hazard shocks on banks can be significant but are often transitory. Banking systems in less developed countries appear more vulnerable and are less able to maintain credit supply under adverse conditions. Banks that are better capitalised and that have incentives to support affected economies contribute to economic resilience. The review identifies several avenues for future research and highlights specific features and trade-offs relevant to policymakers interested in enabling the banking system to contribute to sustained economic development in the face of worsening physical climate risks.

de Bandt O., Kuntz L., Pankratz N., Pegoraro F., Solheim H., Sutton G., Takeyama A., Xia F.D.

AbstractThis literature review describes the recent empirical literature in economics and finance focusing on how climate change‐related risks affect banks, with a particular emphasis on microeconomic evidence. The comparison of empirical estimates shows that many studies project limited estimates of damages for banks. For both loan and bond spreads, most estimates of the effect of climate change are below 50 bp. In comparison, studies on stock markets document responses that are more substantial. In real estate markets, there is evidence of price effects notably for flood risks associated with sea level rise. However, some studies indicate that climate risks could be underestimated. We note challenges related to the measurement of adaptation potential, non‐linear changes in hazards and responses, and the aggregation of effects across studies, markets, and bank portfolios.

Wu B., Wen F., Zhang Y., Huang Z.(.

Chen J., Guo X., Geng Y., Liu R.

AbstractUsing A‐share listed firms from 2009 to 2020 as a research sample, this study constructs firm‐level climate risk through textual analysis to examine whether and how corporate climate risk affect trade credit financing. The empirical results show that increased climate risk inhibits the level of trade credit financing of firms. The results are more prominent for those enterprises without government‐enterprise linkages and firms in cities with high levels of environmental regulation intensity and low levels of city trust. Furthermore, mechanism tests suggest that operational risk and information asymmetry are the main channels affecting the above relationships. In addition, we find that the negative impact of climate risk on trade credit financing will weaken firm value. This paper enriches the research on the impact of climate risk on microeconomic agents and provides new perspectives to alleviate corporate financing constraints.

Thakor A., Yu E.