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Financial fragility and natural disasters: An empirical analysis

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  • Klomp, Jeroen

Abstract

Using data for more than 160 countries in the period 1997–2010, we explore the impact of large-scale natural disasters on the distance-to-default of commercial banks. The financial consequences of natural catastrophes may stress and threaten the existence of a bank by adversely affecting their solvency. After extensive testing for the sensitivity of the results, our main findings suggest that natural disasters increase the likelihood of a banks’ default. More precisely, we conclude that geophysical and meteorological disasters reduce the distance-to-default the most due to their widespread damage caused. In addition, the impact of a natural disaster depends on the size and scope of the catastrophe, the rigorousness of financial regulation and supervision, and the level of financial and economic development of a particular country.

Suggested Citation

  • Klomp, Jeroen, 2014. "Financial fragility and natural disasters: An empirical analysis," Journal of Financial Stability, Elsevier, vol. 13(C), pages 180-192.
  • Handle: RePEc:eee:finsta:v:13:y:2014:i:c:p:180-192
    DOI: 10.1016/j.jfs.2014.06.001
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    Cited by:

    1. Dafermos, Yannis & Nikolaidi, Maria & Galanis, Giorgos, 2017. "Climate change, financial stability and monetary policy," Greenwich Papers in Political Economy 17633, University of Greenwich, Greenwich Political Economy Research Centre.
    2. Iftekhar Hasan & Nada Kobeissi & Haizhi Wang & Mingming Zhou, 2015. "Banking Structure, Marketization, and Small Business Development: Regional Evidence From China," Pacific Economic Review, Wiley Blackwell, vol. 20(3), pages 487-510, August.
    3. Rajhi, Wassim & Albuquerque, Pedro H., 2017. "Banking stability, natural disasters, and political conflicts: Time series evidence on causality in developing countries," Economics Discussion Papers 2017-52, Kiel Institute for the World Economy (IfW).
    4. Subhani Keerthiratne & Richard S. J. Tol, 2017. "Impact of Natural Disasters on Financial Development," Economics of Disasters and Climate Change, Springer, vol. 1(1), pages 33-54, June.
    5. Batten,, Sandra & Sowerbutts, Rhiannon & Tanaka, Misa, 2016. "Let’s talk about the weather: the impact of climate change on central banks," Bank of England working papers 603, Bank of England.
    6. Klomp, Jeroen, 2017. "Flooded with debt," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 93-103.
    7. Noth, Felix & Schüwer, Ulrich, 2017. "Natural disasters and bank stability: Evidence from the U.S. financial system," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168263, Verein für Socialpolitik / German Economic Association.
    8. repec:eco:journ2:2017-03-42 is not listed on IDEAS
    9. Keerthiratne, Subhani & Tol, Richard S.J., 2018. "Impact of natural disasters on income inequality in Sri Lanka," World Development, Elsevier, vol. 105(C), pages 217-230.
    10. Noth, Felix & Rehbein, Oliver, 2017. "Badly hurt? Natural disasters and direct firm effects," IWH Discussion Papers 25/2017, Halle Institute for Economic Research (IWH).

    More about this item

    Keywords

    Banking sector; Financial fragility; Natural disasters;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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