After the Storm: Natural Disasters and Bank Solvency

This study examines how natural disasters affect the sol-vency of banks. It explores (i) whether and how natural dis-asters affect bank solvency, (ii) how accounting and regula-tory measures of bank solvency reflect a bank's true affected-ness, and (iii) whether the effects vary across different types of banks. Analyzing a comprehensive data set on natural cata-strophes 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, capital-ization, 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 sensitiv-ity to natural disasters and the suitability of capital ratios to assess this sensitivity may both be helpful for financial institu-tions and regulatory authorities in designing appropriate risk mitigation strategies.