Journal of Financial and Quantitative Analysis Vol. 57 No. 7 2022
Flooded Through the Back Door: The Role of Bank Capital in Local Shock Spillovers
Abstract
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.
- DOI
- 10.1017/s0022109022000321
- Volume
- 57
- Issue
- 7
- Pages
- 2627-2658
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref