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Hazardous lending: The impact of natural disasters on bank asset portfolio

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  • Bos, Jaap W.B.
  • Li, Runliang
  • Sanders, Mark W.J.L.

Abstract

This paper examines how banks adjust their asset structure in response to changes in loan demand following natural disasters. We demonstrate how banks’ asset diversification strategy helps clients smooth consumption and supports local recovery. In the empirical section, we apply the difference-in-differences method and determine that U.S. commercial banks increase real estate lending after disasters and sell government bonds to finance this disaster-driven credit surge. The theoretical section presents a novel multiple-asset dynamic credit allocation model that explains our empirical findings. We use model simulations to predict and quantify the potential impact of climate change on the asset structure and profitability of banks given different scenarios.

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  • Bos, Jaap W.B. & Li, Runliang & Sanders, Mark W.J.L., 2022. "Hazardous lending: The impact of natural disasters on bank asset portfolio," Economic Modelling, Elsevier, vol. 108(C).
    • Handle: RePEc:eee:ecmode:v:108:y:2022:i:c:s0264999322000062
    DOI: 10.1016/j.econmod.2022.105760
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    Cited by:

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    2. Noth, Felix & Schüwer, Ulrich, 2023. "Natural disasters and bank stability: Evidence from the U.S. financial system," Journal of Environmental Economics and Management, Elsevier, vol. 119(C).
    3. Barth, James R. & Hu, Qinyou & Sickles, Robin & Sun, Yanfei & Yu, Xiaoyu, 2024. "Direct and indirect impacts of natural disasters on banks: A spatial framework," Journal of Financial Stability, Elsevier, vol. 70(C).
    4. Xu, Xin & Huang, Shupei & Lucey, Brian M. & An, Haizhong, 2023. "The impacts of climate policy uncertainty on stock markets: Comparison between China and the US," International Review of Financial Analysis, Elsevier, vol. 88(C).
    5. Joel Huesler, 2024. "Impact of tropical storms on the banking sector in the British Colonial Caribbean," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 18(3), pages 653-690, September.
    6. Shala, Iliriana & Schumacher, Benno, 2022. "The impact of natural disasters on banks' impairment flow: Evidence from Germany," Discussion Papers 36/2022, Deutsche Bundesbank.
    7. Le, Anh-Tuan & Tran, Thao Phuong & Mishra, Anil V., 2023. "Climate risk and bank stability: International evidence," Journal of Multinational Financial Management, Elsevier, vol. 70.
    8. Xin Zhang & Mateng Zhang & Zhong Fang, 2023. "Impact of Climate Risk on the Financial Performance and Financial Policies of Enterprises," Sustainability, MDPI, vol. 15(20), pages 1-24, October.
    9. Lai, Shaojie & Chen, Lihan & Wang, Qing Sophie & Anderson, Hamish, 2022. "Natural disasters, trade credit, and firm performance," Economic Modelling, Elsevier, vol. 116(C).
    10. Agus Sugiarto & Ni Nyoman Puspani & Mustika Septiyas Trisilia, 2023. "The Shocks of Climate Change on Bank Loans," International Journal of Energy Economics and Policy, Econjournals, vol. 13(5), pages 493-514, September.
    11. repec:liv:livedp:202219 is not listed on IDEAS
    12. Matteo Alessi & Ilaria Manti & Luca Santabarbara, 2024. "Natural Disasters, Local banking, and Recovery lending: evidence from an Italian earthquake," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 14(6), pages 1-2.
    13. Celil, Hursit S. & Oh, Seungjoon & Selvam, Srinivasan, 2022. "Natural disasters and the role of regional lenders in economic recovery," Journal of Empirical Finance, Elsevier, vol. 68(C), pages 116-132.
    14. Xu, Minhong & Xu, Yilan, 2023. "Do non-damaging earthquakes shake mortgage lenders' risk perception?," Journal of Environmental Economics and Management, Elsevier, vol. 117(C).
    15. Lee, Chien-Chiang & Wang, Chih-Wei & Thinh, Bui Tien & Xu, Zhi-Ting, 2022. "Climate risk and bank liquidity creation: International evidence," International Review of Financial Analysis, Elsevier, vol. 82(C).
    16. Ghosh, Saibal, 2023. "Does climate legislation matter for bank lending? Evidence from MENA countries," Ecological Economics, Elsevier, vol. 212(C).
    17. Barnes, Stephen & Joshi, Swarup & Terrell, Dek, 2023. "Disasters and health insurance: Evidence from Louisiana," Economic Modelling, Elsevier, vol. 128(C).

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    More about this item

    Keywords

    Banks; Disasters; Diversification; Climate change;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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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