Flooded through the back door: The role of bank capital in local shock spillovers

Oliver Rehbein and Steven Ongena
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Oliver Rehbein: University of Bonn - Department of Economics; Halle Institute for Economic Research

No 20-07, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper 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 non-disaster areas via their banks. Firms connected to a strongly disaster-exposed bank with lowest-quartile capitalization significantly reduce total borrowing by 4.8%, employment by 2.7% and tangible assets by 7.5% compared to similar firms connected to a well-capitalized bank. These findings translate to negative regional effects on GDP and unemployment. Banks also particularly reduce their exposure to this-time-unaffected but in general disaster-prone areas following a disaster.

Keywords: natural disaster; real effects; shock transmission; bank capital (search for similar items in EconPapers)
JEL-codes: E24 E44 G21 G29 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2020-02
New Economics Papers: this item is included in nep-mac and nep-ure
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Flooded Through the Back Door: The Role of Bank Capital in Local Shock Spillovers (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2007

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