Hazardous lending: The impact of natural disasters on bank asset portfolio

J.W.B. Bos, R.L. Li*, M.W.J.L. Sanders

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

2 Citations (Web of Science)

Abstract

This paper examines how banks adjust their asset structure in response to changes in loan demand following natural disasters. We demonstrate how banks' asset diversification strategy helps clients smooth consumption and supports local recovery. In the empirical section, we apply the difference-in-differences method and determine that U.S. commercial banks increase real estate lending after disasters and sell government bonds to finance this disaster-driven credit surge. The theoretical section presents a novel multiple-asset dynamic credit allocation model that explains our empirical findings. We use model simulations to predict and quantify the potential impact of climate change on the asset structure and profitability of banks given different scenarios.
Original languageEnglish
Article number105760
Number of pages18
JournalEconomic Modelling
Volume108
DOIs
Publication statusPublished - 1 Mar 2022

JEL classifications

  • g11 - "Portfolio Choice; Investment Decisions"
  • g21 - "Banks; Depository Institutions; Micro Finance Institutions; Mortgages"
  • q54 - "Climate; Natural Disasters; Global Warming"

Keywords

  • Banks
  • Disasters
  • Diversification
  • Climate change
  • RARE DISASTERS
  • AGENCY COSTS
  • NET WORTH
  • RISK
  • CREDIT
  • MARKETS
  • PRICES
  • UNCERTAINTY
  • SELECTION
  • MODEL

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