Flooded Through the Back Door: The Role of Bank Capital in Local Shock Spillovers

Oliver Rehbein and Steven Ongena

Journal of Financial and Quantitative Analysis, 2022, vol. 57, issue 7, 2627-2658

Abstract: This article demonstrates that low bank capital carries a negative externality because it amplifies local shock spillovers. We exploit a natural disaster that is transmitted to firms in nondisaster areas via their banks. Firms connected to a strongly disaster-exposed bank with lowest-quartile capitalization significantly reduce their total borrowing by 6.6% and tangible assets by 6.9% compared to similar firms connected to a well-capitalized bank. These findings translate to negative regional effects on GDP and unemployment. Additionally, following a disaster event, banks reduce their exposure to currently unaffected but generally disaster-prone areas.

Date: 2022
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Working Paper: Flooded through the back door: The role of bank capital in local shock spillovers (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:57:y:2022:i:7:p:2627-2658_5

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