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Hazardous Lending: The Impact of Natural Disasters on Banks'Asset Portfolio

J. Bos, Runliang Li and Mark Sanders
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Runliang Li: Finance

No 21, Research Memorandum from Maastricht University, Graduate School of Business and Economics (GSBE)

Abstract: This paper studies how banks adjust their asset structure in response to changes in loan demand after natural disasters. We show how banks help clients smoothen consumption and support local recovery through their asset diversification strategy. In the empirical part, using a difference-in-difference method, we find that U.S. commercial banks increase real estate lending after disasters and sell government bonds to finance such a disaster-driven demand surge. In the theoretical part of this paper we present a novel multiple-asset dynamic credit rationing model that explains these empirical findings. Using simulations of our model we can then predict and quantify the possible impact of climate change on the asset structure and profitability of banks for different scenarios.

Keywords: banks; disasters; diversification; climate change (search for similar items in EconPapers)
JEL-codes: G21 Q54 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-env
Date: 2018-08-27
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Persistent link: https://EconPapers.repec.org/RePEc:unm:umagsb:2018021

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