Do natural disasters affect credit risk? Evidence from global banks

Abstract

This study examines how natural disasters affect banks' global credit risk. This study measures the number of people killed, houses destroyed, and dwellings damaged by natural disasters while non-performing loan ratios measure credit risk.  This study employed POLS, white heteroscedastic-robust and double-clustered standard errors to demonstrate the relationship between the variables for each measure using data from 485 global banking companies from 2018 to 2022. This study then used a two-stage GMM for the endogeneity result to confirm a causal relationship between natural disasters and credit risk. The result shows that all explanatory variables positively correlated, suggesting that natural disasters cause higher credit risk for global banks. This study shows that no relationship is robust to alternative credit risk measures and estimation methods, and it passes several endogeneity tests. The results of this study have practical implications for banks, emphasizing the need to adopt strong risk management techniques to reduce the effects of disasters on loan repayment. The implication of this study provides the government with an understanding of how to strategically provide assistance and incentives to help banks become more resilient in disaster-prone areas.