We examine the relation between disaster risk and banks’ loan loss provision estimates. We propose a disaster risk measure based on the natural disasters declared by the Federal Emergency Management Agency over the past five years. We theoretically support and empirically validate our measure using the UN Sendai Framework for disaster risk reduction, which relates disaster risk to natural hazard, exposure, and vulnerability. Using more than 374,000 bank-quarter observations, we document that banks located in counties with higher disaster risk recognize larger provisions for loan losses. We employ several techniques to ensure the robustness of our findings, including difference-in-differences estimation, matched samples, and instrumental variables. Our results are important,especially because of the increasing concern about disaster risk and because they inform the growing debate on the economic consequences of disaster risk and the ability of the banking system to incorporate this particular type of risk.

The seminar will be held both in presence and online, click here to participate