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Flooded Through the Back Door: The Role of Bank Capital in Local Shock Spillovers

Published online by Cambridge University Press:  10 May 2022

Oliver Rehbein  and
Steven Ongena Open the ORCID record for Steven Ongena [Opens in a new window]
Oliver Rehbein
Affiliation:
University of Bonn Department of Economicsoliver.rehbein@uni-bonn.de
Steven Ongena*
Affiliation:
University of Zurich Department of Banking and Finance; Swiss Finance Institute; KU Leuven Department of Economics and Business; NTNU Business School Department of Finance and CEPR
*
steven.ongena@bf.uzh.ch (corresponding author)
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Abstract

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This article 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 nondisaster 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 7 , November 2022 , pp. 2627 - 2658
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Thorsten Beck, Chris Becker, Santiago Carbo-Valverde, Matthieu Chavaz, Kristle Romero Cortés, Hans Degryse, Michael Goedde-Menke, Hendrik Hakenes, Jérôme Hericourt, Michael Koetter, Thomas Krause, Paul Malatesta (the editor), Felix Noth, Simon Rother, Eva Schliephake, Isabel Schnabel, Ulrich Schüwer, Gregor von Schweinitz, Sascha Steffen, Laurent Weil, Susanne Wildgruber, and the copy editor for valuable comments and suggestions. We are grateful for feedback from participants at the PhD seminar series at the IWH, the 2018 European Economic Association Conference, 2017 IBEFA at WEAI Vancouver, the 2017 Midwest Finance Association Conference, the 2017 Finance and Insurance Seminar, the 2017 German Finance Association Conference, the 2017 INFINITI Conference, the 2017 RIEF Doctoral Meetings in International Trade and Finance, and the 2017 Workshop on Banks and Financial Markets. We appreciate Ruben Eberlein’s help building the data set. Ongena acknowledges financial support from ERC ADG 2016 – GA 740272 lending. Rehbein acknowledges financial support by the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) through CRC TR 224. Support from the German Association of Insurers in terms of claim rates data for natural disasters is highly appreciated. A previous version of this article was circulated under the title “Flooded Through the Back Door: Firm-Level Effects of Banks’ Lending Shifts.”

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