Transmission of natural disasters to the banking sector: Evidence from thirty years of tropical storms in the Caribbean

Abstract

Banks can play a vital role in helping affected communities to cope with natural disasters. Using data on 92 damaging tropical storms, this paper explores the channels through which 111 individual banks from 20 Caribbean and Central American jurisdictions have been affected. Our results suggest that damaging tropical storms are associated with immediate and long-lasting adverse funding shocks. Banks from the small island economies face withdrawals of deposits, while banks from the continental countries are affected by adverse shocks to short-term funding. In both regions bank lending to the private sector drops in the initial years. The natural disaster shock is associated with persistent loan defaults and bank losses in the continental countries, whereas in the small island economies losses only start materializing after four years. In the two regions, the tropical storm recovery is thus credit-less.