The Impact of Natural Disasters on Banks' Impairment Flow: Evidence from Germany

Shala, Iliriana; Schumacher, Benno

doi:10.2139/ssrn.4261449

Cited by 1 publication

(1 citation statement)

References 36 publications

(39 reference statements)

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“…Faiella and Natoli (2018) observe that banks' lending is negatively correlated with flood risks in Italy. These studies and other related studies largely document that the performance measures and the survivorship of banking institutions decrease with natural disasters (Caloia and Jansen, 2021; Flood risk on US community banks Blickle et al, 2021;Cort es and Strahan, 2017;Gourevitch et al, 2023;Ogura et al, 2022;Schubert, 2021;Shala and Schumacher, 2022). While some existing studies examine managerial decisions (such as the lending size and the interest rates), these studies often rely on small sub-sample or event-specific data.…”

Section: Literature Reviewmentioning

confidence: 99%

Struggle to survive: case of flood risk on US community banks

Oh,

Kim

2023

AFR

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PurposeThe survivorship of firms under extreme weather poses an essential question about the local economy's health. Over 90% of agricultural banks are categorized as community banks, which are important financial institutions promoting local growth. While previous studies suggest that climate change and weather shocks adversely impact community banks' resiliency, studies on whether these institutions engage in risk-reducing management strategies have been limited. In this study, the authors examine strategic choices of local community banks when facing flood events which include (1) safety net increase, (2) portfolio diversification, and (3) branch opening. These strategic choices are the coping mechanisms banks can take to survive while affecting the local competitive lending market.Design/methodology/approachThe authors use panel-fixed effect regressions based on the storm data from National Oceanic and Atmospheric Administration (NOAA)'s National Weather Service (NWS) and the call reports from the Federal Deposit Insurance Corporation (FDIC). The authors focus on community banks' account variable characteristics and the number of offices to examine whether community banks take an active role in managing flood risk.FindingsResults suggest that community banks do employ the selected strategic choices to a certain degree, as it is found that there is an increase in the core capital that absorbs shocks and portfolio diversification. However, the magnitudes of these activities are rather small and not large enough to fully mitigate the climate risk. Also, the authors do not find any evidence of branch expansion associated with local floods.Originality/valueThis study contributes to the literature by examining different strategic choices of community banks in the face of natural uncertainty. Even though concerns of climate risk have been raised in the regulatory setting, a lack of guidance or assessment tools could contribute to the passive action of these community banks, even though climate risks can have a significant economic impact. Thus, the evidence documented from this study calls for further guidelines and the importance of highlighting climate risks on community banks so that they can actively engage in risk-reducing strategies.

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