The impact of natural disasters on the banking sector: Evidence from hurricane strikes in the Caribbean
Date of Publication
2019 12:00 AM
Publication Date
January 4, 2019
Security Theme
Extreme Events
Keywords
Extreme Events, srhreports, naturaldisasters, banking sector, natural disasters, small island economies, Eastern Caribbean islands, deposit withdrawals, bank lending
Description
While natural disasters cause considerable damage and a number of studies have attempted to investigate the nature and quantify the magnitude of these losses, there is a paucity of empirical evidence on the impact on the banking sector. In this paper a panel of quarterly banking data and historical losses due to hurricane strikes for islands in the Eastern Caribbean is constructed to econometrically investigate the impact of these natural disasters on the banking industry. Results suggest that, following a hurricane strike, banks face deposit withdrawals and experience a negative funding shock to which they respond by reducing the supply of lending and by drawing on liquid assets. Therefore, the withdrawal and use of deposits rather than an expansion in credit appears to play a significant role in funding post hurricane recovery in the region. This points to the importance of an active reserve requirement policy.
Report Location
The impact of natural disasters on the banking sector: Evidence from hurricane strikes in the Caribbean
While natural disasters cause considerable damage and a number of studies have attempted to investigate the nature and quantify the magnitude of these losses, there is a paucity of empirical evidence on the impact on the banking sector. In this paper a panel of quarterly banking data and historical losses due to hurricane strikes for islands in the Eastern Caribbean is constructed to econometrically investigate the impact of these natural disasters on the banking industry. Results suggest that, following a hurricane strike, banks face deposit withdrawals and experience a negative funding shock to which they respond by reducing the supply of lending and by drawing on liquid assets. Therefore, the withdrawal and use of deposits rather than an expansion in credit appears to play a significant role in funding post hurricane recovery in the region. This points to the importance of an active reserve requirement policy.
