Natural Disasters and Financial Stress: Can Macroprudential Regulation Tame Green Swans?

Abstract

We empirically investigate the impact of natural disasters on the external finance premium (EFP), conditional on the stringency of macroprudential regulation. The intensity of natural disasters is measured through an original set of geophysical indicators for a sample of 88 countries over the period 1996-2016. Using local projections, we show that the EFP significantly rises following storms when macroprudential regulation is lax. Moreover, this adverse financial impact increases over time. At the opposite, a stringent macroprudential framework prevents the financing conditions from tightening. The EFP may even drop, but especially in middle-income countries and only when extreme events are considered. Finally, macroprudential stringency seems less crucial in the case of floods, the predictability of which may prompt self-discipline.

Keywords: Financial stress, External finance premium, Macroprudential policy, Natural disasters, Lo-cal projections