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Flooded through the back door: The role of bank capital in local shock spillovers

Author

Listed:
  • Oliver Rehbein

    (University of Bonn - Department of Economics; Halle Institute for Economic Research)

  • Steven Ongena

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))

Abstract

This paper demonstrates that low bank capital carries a negative externality because it amplifies local shock spillovers. We exploit a natural disaster that is transmitted to firms in non-disaster areas via their banks. Firms connected to a strongly disaster-exposed bank with lowest-quartile capitalization significantly reduce total borrowing by 4.8%, employment by 2.7% and tangible assets by 7.5% compared to similar firms connected to a well-capitalized bank. These findings translate to negative regional effects on GDP and unemployment. Banks also particularly reduce their exposure to this-time-unaffected but in general disaster-prone areas following a disaster.

Suggested Citation

  • Oliver Rehbein & Steven Ongena, 2020. "Flooded through the back door: The role of bank capital in local shock spillovers," Swiss Finance Institute Research Paper Series 20-07, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2007
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    Cited by:

    1. Mueller, Isabella & Sfrappini, Eleonora, 2022. "Climate Change-Related Regulatory Risks and Bank Lending," Working Paper Series 2670, European Central Bank.
    2. Winter-Ebmer, Rudolf & Baumgartner, Simon & Stomper, Alex & Schober, Tom, 2022. "Banking on Snow: Bank Capital, Risk, and Employment," CEPR Discussion Papers 17693, C.E.P.R. Discussion Papers.
    3. Shala, Iliriana & Schumacher, Benno, 2022. "The impact of natural disasters on banks' impairment flow: Evidence from Germany," Discussion Papers 36/2022, Deutsche Bundesbank.
    4. 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.
    5. 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.
    6. Kristian S. Blickle & João A. C. Santos, 2022. "Unintended Consequences of "Mandatory" Flood Insurance," Staff Reports 1012, Federal Reserve Bank of New York.

    More about this item

    Keywords

    natural disaster; real effects; 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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