Banking stability, natural disasters, and political conflicts: Time series evidence on causality in developing countries

The authors adopt a panel structural VAR modeling approach to model the causal effects of natural disasters and state fragility on aggregate financial system variables such as deposits, non-performing loans, and GDP per capita. They divide the sample by banking sector variable and they develop 8 panels across more than 63 developing countries over a 13 year period (1999-2011) for all countries in the dataset, excluding high-income countries. It is noteworthy that these analyses are the first of their kind to evaluate empirically the link between natural disasters, state fragility and banking variables. The main findings suggest that natural disasters, as measured by a life years lost index, and state fragility are both predictive of higher non-performing loans and higher likelihood of default in developing countries. The results also indicate that natural disasters decrease the banking deposits and financial system deposits while state fragility decrease the banking deposits and increase the financial system deposits.