After the Storm: Natural Disasters and Bank Solvency

  • Mohammad Bitar, Nottingham University Business School, Jubilee Campus, Nottingham, United Kingdom
  • Dieter Gramlich, Baden-Wuerttemberg Cooperative State University, Heidenheim, Germany
  • Thomas Walker, John Molson School of Business, Concordia University, Montreal, Canada
  • Yunfei Zhao, John Molson School of Business, Concordia University, Montreal, Canada
Flooded road after heavy storm

Executive Summary

This study examines how natural disasters affect the solvency of banks. It explores (1) whether and how natural disasters affect bank solvency, (2) how accounting and regulatory measures of bank solvency reflect a bank’s true affectedness, and (3) whether the effects vary across different types of banks. Analyzing a comprehensive dataset on natural catastrophes and detailed financial statements for 9,928 banks that operate in 149 countries, the main finding is that damages from disasters matter: they negatively affect capital ratios, and the severity of their impact depends on a bank’s location, capitalization, and business model. Particularly, the results show that accounting measures of solvency are more sensitive to disasters than are regulatory measures. Evidence of a bank’s sensitivity to natural disasters and the suitability of capital ratios to assess this sensitivity may both be helpful for financial institutions and regulatory authorities in designing appropriate risk mitigation strategies.