Borrowers under water! Rare disasters, regional banks, and recovery lending

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte.We show that local banks provide corporate recovery lending to firms affected by adverse regional macro shocks. Banks that reside in counties unaffected by the natural disaster that we specify as macro shock increase lending to firms inside affected counties by 3%. Firms domiciled in flooded counties, in turn, increase corporate borrowing by 16% if they are connected to banks in unaffected counties. We find no indication that recovery lending entails excessive risk-taking or rent-seeking. However, within the group of shock-exposed banks, those without access to geographically more diversified interbank markets exhibit more credit risk and less equity capital. Abstract * We are indebted to two anonymous referees, the co-editors, and the managing editor, Murillo Campello, for very clear and constructive feedback. Furthermore, we thank for valuable comments and suggestions. We are grateful for feedback from participants at the PhD seminar series at the IWH, the 9th RGS Conference, the 31st EEA meetings, the 23rd German Finance Association meeting, the 6th Workshop on Banks and Financial Markets in Vienna, the 2017 IBEFA-ASSA meetings, the 66th MFA meetings, and the 12th FIRS conference. Support from the German Association of Insurances in terms of claim rates data due to natural disasters is highly appreciated. The opinions expressed in this paper are those of the authors and do not necessarily reflect those of any of the associated institutions. All errors are our own.

Place-based entrepreneurs and their competitiveness: a relational perspective on small regional banks

“…To this aim, the paper focuses on the tight, and place-dependent, relationships of the banks with regional SMEs (cf. Koetter et al 2020). Based on a literature review and research propositions, which are derived from the literature, an illustrative case study from German public-sector saving banks (Sparkassen) and mutual savings-cooperative banks (Genossenschaftsbanken) is presented.…”

What Drives Banks' Geographic Expansion? The Role of Locally Non-Diversifiable Risk

“…Chavaz (2016) finds that lenders that had very concentrated portfolios in markets affected by the 2005 hurricane season increased lending through loan sales. Koetter, Noth, and Rehbein (2019) investigate the 2013 Elbe flood in Germany and find that banks with relationships to flooded firms significantly increase lending, which potentially eased the recovery after the flood. Noth and Schüwer (2018) show that weather-related natural disasters weaken the stability of U.S. banks.…”

In the Eye of the Storm

“…Concerning the micro-level behavior that explains the above phenomena, our paper is most related to the recent literature of credit dynamics during natural disaster times (Berg and Schrader, 2012;Chavaz, 2014;Koetter et al, 2016;Cortés and Strahan, 2017;Dlugosz et al, 2017). For example, Berg and Schrader (2012) show that the demand for credit increases after volcanic eruptions in Ecuador.…”

“…The extent to which banks can perform this role can be greatly affected by natural hazards. It is commonly known that natural disasters affect banks in two distinct ways (Collier, 2014;Koetter et al, 2016;Cortés and Strahan, 2017). On the one hand, natural disasters temporarily stimulate the demand for loans by destroying firms' productive capital and household property.…”

“…2 Against the background of climate change, natural disasters are likely to become more frequent (Pachauri et al, 2014) and have received more attention from researchers. As a result, an emerging strand of literature discusses how banks geographically reallocate assets to meet disaster-driven increases in demand (Chavaz, 2014;Cortés and Strahan, 2017), how natural disasters affect banks' solvency (Klomp, 2014), and how bank-borrower relationships can affect borrowers' access to credit after natural disasters (Berg and Schrader, 2012;Koetter et al, 2016).…”