The Impact of Natural Disasters on Bank Performance and the Moderating Role of Financial Integration

Abstract

Using a sample of East Asian banks covering the period 1999-2014, this paper analyses the impact of natural disasters on commercial bank performance and how financial integration moderates this relationship. A dynamic GMM model reveals that natural disasters significantly lower deposit ratios but have no contemporaneous relationship with liquidity, credit risk, profitability and default risk. The paper also shows that foreign banking claims, specifically those extended by regional Asian lenders, help to alleviate the deposits decline in the aftermath of natural disasters. These results highlight the role of commercial bank deposits and foreign banking claims as sources of finance for post-disaster recovery. In particular, the resilience of Asian foreign claims in the event of natural disasters provides evidence to support intra-regional financial integration in East Asia.

Keywords: Natural Disaster, Bank Performance, Financial Integration, Dynamic GMM, East Asia

JEL Classification: C14, G21, D24, F36, F38