Financing Recovery after Disasters: Explaining Community Credit Market Responses to Severe Events

57 Pages Posted: 10 Nov 2016 Last revised: 29 Mar 2017

See all articles by Benjamin Collier

Benjamin Collier

Temple University - Risk Management & Insurance & Actuarial Science

Volodymyr Babich

McDonough School of Business, Georgetown University

Date Written: March 28, 2017

Abstract

Credit provides a means for uninsured households and businesses to manage disaster losses, but access to credit may be tenuous after severe events. Using lender fixed effects models, we examine how natural disasters affect the amount of credit supplied by community lenders in developing and emerging economies. We find that disasters reduce lending. We consider two potential causes of lending reductions: 1) disasters reduce expected returns on loans made after the event or 2) capital constraints, lenders' difficulty replacing equity lost during the event. We develop a dynamic model that informs our empirical identification of these causes and conclude that capital constraints cause observed credit contractions. We also examine the effects of insurance market development and find evidence that insurance preserves the creditworthiness of borrowers. Our results demonstrate pervasive disaster-related credit supply shocks in developing and emerging economies and identify new insurance market opportunities.

Keywords: Natural Disasters, Credit Supply, Small and Medium Enterprises, Insurance Market Development, Disaster Financing

JEL Classification: Q54, G21, G28, D21, D22

Suggested Citation

Collier, Benjamin and Babich, Volodymyr, Financing Recovery after Disasters: Explaining Community Credit Market Responses to Severe Events (March 28, 2017). Georgetown McDonough School of Business Research Paper No. 2866478; Fox School of Business Research Paper No. 17-005. Available at SSRN: https://ssrn.com/abstract=2866478 or http://dx.doi.org/10.2139/ssrn.2866478

Benjamin Collier (Contact Author)

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1301 Cecil B. Moore Ave.
Philadelphia, PA 19122
United States

Volodymyr Babich

McDonough School of Business, Georgetown University ( email )

3700 O Street, NW
Washington, DC 20057
United States

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