Direct and Indirect Impacts of Natural Disasters on Banks: A Spatial Framework

Abstract

We examine the direct and indirect impacts of natural disasters on deposit rates of U.S. bank branches from 2008 to 2017. To the best of our knowledge, this approach is the first to capture spatial spillover effects of disasters on the deposit rate setting of competing branches for deposits based on their geographic distance from those branches in counties directly exposed to such disasters. We find indirect effects contribute at least two-thirds of the total impact for deposit rate-setting branches. Rate-setting branches in affected counties, on average, raise their deposit rates on 12-month CDs by 1.5 basis points directly due to the disaster shock. However, there is an additional indirect increase of 2.7 - 4.3 basis points for all rate-setting branches, including those in adjacent but unaffected counties, due to the local geographical competition for deposits. We also confirm that the spillover effect occurs among branches across counties via an overlooked social connection network. Moreover, and importantly, online and one-county banks are more likely to rely on the information channel embedded in the social connection network in response to natural disasters.

Keywords: banks, bank branches, deposit rates, natural disasters, spatial analysis

JEL Classification: G21, C31, Q54