How Bad Are Weather Disasters for Banks? Not very, we find that weather disasters over the last quarter century had insignificant or small effects on U.S. banks’ performance

How Bad Are Weather Disasters for Banks? Kristian S. Blickle, Sarah N. Hamerling, and Donald P. Morgan. Federal Reserve Bank of New York, Staff Report Number 990 November 2021. https://www.newyorkfed.org/research/staff_reports/sr990

Abstract: Not very. We find that weather disasters over the last quarter century had insignificant or small effects on U.S. banks’ performance. This stability seems endogenous rather than a mere reflection of federal aid. Disasters increase loan demand, which offsets losses and actually boosts profits at larger banks. Local banks tend to avoid mortgage lending where floods are more common than official flood maps would predict, suggesting that local knowledge may also mitigate disaster impacts.

JEL: G21, H84

5 Conclusion

More extreme weather is one potential vector from climate change to bank and financial stability. It is a standard, prominent arrow in diagrams showing potential transmission mechanisms. Our findings suggest the disaster channel is not likely a material source of instability for banks. Even very small banks facing extreme disasters are not substantially threatened.

This resilience seems inherent to some degree because disasters increase the demand for loans. Earnings on new loans helps offset losses on loans on the books. In fact, income for larger banks increase after disasters. Local banks also manage to limit exposure to high risk areas, perhaps reflecting their greater knowledge of such risks. Those endogenous factors seem to buttress banks more than federal disaster assistance. Insurance is another likely mitigating factor that we do not explore. That is worthwhile topic future research.

For policymakers, our findings suggest that potential transition risks from climate change warrant more attention than physical disaster risks.