Do non-damaging earthquakes shake mortgage lenders' risk perception?

Minhong Xu and Yilan Xu

Journal of Environmental Economics and Management, 2023, vol. 117, issue C

Abstract: This study examines how banks respond to earthquakes that convey seismic risk salience but do not cause damage, i.e., noticeable non-damaging earthquakes (NNDEs). Using evidence from California, we find loans more likely to be denied or sold after increased NNDEs. Banks with fewer assets, more diversified branching markets, or stronger sales capability relied more on securitization to transfer the perceived seismic risk. We show evidence that banks likely learned about the NNDEs through personal experience and local news. The effects of NNDEs persisted up to three years. Meanwhile, the NNDEs only caused moderate and temporary collateral devaluation but did not increase the observable default risk. Thus, banks' responses most likely resulted from the increased risk salience of future damaging earthquakes during the mortgage term. Our findings call for reevaluations of the heuristics in banks' risk-perception updating and have implications for designing more efficient disaster risk-sharing mechanisms in the financial market.

Keywords: Earthquake risk; Bank lending; Disaster risk-sharing (search for similar items in EconPapers)
JEL-codes: D8 H4 L15 L31 Q5 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:117:y:2023:i:c:s0095069622001139

DOI: 10.1016/j.jeem.2022.102760

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