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Flooded Through the Back Door: The Role of Capital in Local Shock Spillovers

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  • Oliver Rehbein
  • Steven Ongena

Abstract

This paper demonstrates that low bank capital carries a negative externality because it ampli es local shock spillovers. We exploit a natural disaster that is transmitted to rms in non-disaster areas via their banks. Firms connected to a strongly disaster-exposed bank with lowest-quartile capitalization signi cantly re- duce total borrowing by 4.8 %, employment by 2.7% and tangible assets by 7.5% compared to similar rms connected to a well-capitalized bank. These ndings translate to negative regional e ects on GDP and unemployment. Banks also par- ticularly reduce their exposure to this-time-una ected but in general disaster-prone areas following a disaster.

Suggested Citation

  • Oliver Rehbein & Steven Ongena, 2020. "Flooded Through the Back Door: The Role of Capital in Local Shock Spillovers," CRC TR 224 Discussion Paper Series crctr224_2020_043v2, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2020_043v2
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp043
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    Citations

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    Cited by:

    1. Shala, Iliriana & Schumacher, Benno, 2022. "The impact of natural disasters on banks' impairment flow: Evidence from Germany," Discussion Papers 36/2022, Deutsche Bundesbank.
    2. Ivan T. Ivanov & Marco Macchiavelli & João A. C. Santos, 2022. "Bank lending networks and the propagation of natural disasters," Financial Management, Financial Management Association International, vol. 51(3), pages 903-927, September.
    3. Kristian S. Blickle & João A. C. Santos, 2022. "Unintended Consequences of "Mandatory" Flood Insurance," Staff Reports 1012, Federal Reserve Bank of New York.
    4. Kakuho Furukawa & Hibiki Ichiue & Noriyuki Shiraki, 2020. "How Does Climate Change Interact with the Financial System? A Survey," Bank of Japan Working Paper Series 20-E-8, Bank of Japan.

    More about this item

    Keywords

    natural disaster; real e ects; shock transmission; bank capital;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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