Borrowers Under Water! Rare Disasters, Regional Banks, and Recovery Lending
We test if and how banks adjust their lending in response to disaster risk in the form of a natural catastrophe striking its customers: the 2013 Elbe flooding. The flood affected firms in East and South Germany, and we identify shocked banks based on bank-firm relationships gathered for more than a million firms. Banks with relationships to flooded firms lend 13-23% more than banks without such customers compared to the preflooding period. This lending hike is associated with higher profitability and reduced risk. Our results suggest that local banks are an effective mechanism to mitigate rare disaster shocks faced especially by small and medium firms.