Flooded Through the Back Door: The Role of Bank Capital in Local Shock Spillovers
Peer reviewed, Journal article
Published version
Date
2022Metadata
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- NTNU Handelshøyskolen [1718]
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Original version
10.1017/S0022109022000321Abstract
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.