Flooded through the Back Door: The Role of Bank Capital in Local Shock Spillovers
68 Pages Posted: 3 Mar 2020 Last revised: 2 Nov 2020
Date Written: February 27, 2020
This paper demonstrates that low bank capital carries a negative externality because it amplifies local shock spillovers. We exploit a natural disaster that is transmitted to firms in non-disaster areas via their banks. Firms connected to a strongly disaster-exposed bank with lowest-quartile capitalization significantly reduce their total borrowing by 6.6% and tangible assets by 6.9% compared to similar firms connected to a well-capitalized bank. These findings translate to negative regional effects on GDP and unemployment. Additionally, following a disaster event, banks reduce their exposure to currently unaffected but generally disaster-prone areas.
Keywords: natural disaster, real effects, shock transmission, bank capital
JEL Classification: G21, G29, E44, E24
Suggested Citation: Suggested Citation