Recovery Lending after Natural Disasters

Abstract

This paper examines how banks’ incentives to internalize the negative spillovers from natural disasters affect their credit lending. Using data on small business loans and damage estimates from natural disasters, I find that banks with a large lending share in a local market provide more credit to small firms during the recovery periods than other banks. This finding implies that banks recognize the benefits of alleviating liquidity constraints for distressed borrowers, which lowers the default risk and preserves their future business opportunities. Furthermore, I document that disaster-affected local areas with high-lending-share banks experience higher employment growth than other disaster-affected areas. The paper underscores the importance of bank lending in disaster recovery and resilience.