Banking on Snow: Bank Capital, Risk, and Employment

How does small-firm employment respond to exogenous labour productivity risk? We find that this depends on the capitalization of firms’ local banks. The evidence comes from firms employing workers whose productivity depends on the weather. Weather- induced labour productivity risk reduces this employment, and this effect is stronger in regions where the regional banks have less equity capital. Bank capitalization also proxies for the extent to which the regional banks’ borrowers can obtain liquidity when the regions are hit by weather shocks. We argue that, as liquidity providers, well- capitalized banks support economic adaptation to climate change.