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

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

Economic Modelling, 2022, vol. 108, issue C

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.

Keywords: Banks; Disasters; Diversification; Climate change (search for similar items in EconPapers)
JEL-codes: G11 G21 Q54 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:108:y:2022:i:c:s0264999322000062

DOI: 10.1016/j.econmod.2022.105760

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