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

See all articles by Oliver Rehbein

Oliver Rehbein

University of Bonn - Department of Economics; Halle Institute for Economic Research

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Date Written: February 27, 2020

Abstract

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

Rehbein, Oliver and Ongena, Steven R. G., Flooded through the Back Door: The Role of Bank Capital in Local Shock Spillovers (February 27, 2020). Swiss Finance Institute Research Paper No. 20-07, Available at SSRN: https://ssrn.com/abstract=3547295 or http://dx.doi.org/10.2139/ssrn.3547295

Oliver Rehbein

University of Bonn - Department of Economics ( email )

Bonn
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Steven R. G. Ongena (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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