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Financial Constraints and Employment Dynamics following Natural Disasters

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Abstract

We use confidential loan-level regulatory data to show that financial constraints can weigh on credit access and employment after a natural disaster at both the local and national level. Banks cut back on lending in disaster areas, particularly to the most financially constrained firms, and these reductions in credit supply lead to larger initial declines and slower subsequent recoveries in employment. Bank profitability is a key driver of this result: Borrowers more reliant on less-profitable lenders obtain fewer loans and pay higher interest rates following disasters. These less-profitable lenders also respond by providing fewer loans and charging higher interest rates to financially constrained borrowers in other unaffected areas. We show that these financial spillovers ultimately distort employment growth. Our findings suggest a potential role for policies that improve access to credit in the aftermath of natural disasters.

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  • Cooper Howes & Johannes Matschke & Jordan Pandolfo, 2025. "Financial Constraints and Employment Dynamics following Natural Disasters," Research Working Paper RWP 25-16, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:102146
    DOI: 10.18651/RWP2025-16
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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