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2023 | Book

Banking Institutions and Natural Disasters

Recovery, Resilience and Growth in the Face of Climate Change


About this book

This book looks more closely at how natural disasters impact bank activity and how banks can support economic recovery after a natural disaster. The importance of banks in this context is underscored by increasing regulatory attention on their role in fostering a sustainable future, but also on the risks that climate change poses to bank stability.

Humanity has tried to cope with the short- and long-term economic consequences of natural disasters for centuries. However, the severity of these events is constantly increasing in magnitude, due to the alteration of the earth’s climate and the environment. They pose a serious threat to the lives of millions of people especially in less developed countries. At the same time, the international community has acknowledged that weather hazards’ impact and countries’ resilience to them are affected by various socio-economic factors, such as the well-functioning of financial institutions, especially commercial banks.

Banks will inevitably adapt their strategies to address concerns arising from climate change. In doing this, the book discusses partnerships with international cooperation institutions, other financial intermediaries, and local governments, so that the green transition ensures an inclusive growth for all, especially the most vulnerable parts of our societies. This book is of interest to researchers, academics, and students of sustainable finance and climate finance.

Table of Contents

Chapter 1. Overview
Natural disasters have long-lasting socio-economic impacts on populations and countries impacted by them, especially in emerging economies. Weather-related catastrophes are becoming more prevalent as the planet heats up. These events affect the financial sector through several channels, such as the collateral value of bank loans or borrowers’ ability to pay off debt. At the same time, the financial sector plays an essential role in the post-disaster economic recovery through reconstruction lending. The link between natural disasters and bank activity is, therefore, complex. This book aims to shed light on the importance of financial institutions in promoting growth after extreme weather events.
Andi Duqi
Chapter 2. The Economic Impact of Natural Disasters
Statistics indicate that recorded disaster events and losses have steadily increased in the last 30 years. Researchers have dedicated considerable attention to the economic impact of natural disasters, especially their long-term consequences. This literature acknowledges that the impact of natural disasters on growth is always mediated by other socio-economic factors related to a single country or region, such as the quality of the institutions, political stability, financial sector development, pre-disaster income per capita, or financial liberalization.
Andi Duqi
Chapter 3. The Consequences of Natural Disasters on Banking Institutions
Extreme weather events threated the banking sector through depreciation of collateral, increase of counterparty bankruptcies, misvaluation of securities held in bank portfolios, and increase of funding risk. At the same time, post-disaster reconstruction boosts the demand for credit, which, if met by banks, can increase their revenues and improve their profitability. Bank regulators around the globe are taking several measures to address climate risk exposure of banks, such as climate stress tests or climate scenario analyses. However, these exercises are still at an early stage and do not adequately quantify the complex relationships between disasters, banks, and the real economy.
Andi Duqi
Chapter 4. The Role of Banks in Promoting Post-disaster Economic Growth
Academic research on post-disaster recovery acknowledges that growth stems from increased bank lending to accommodate reconstruction efforts. Local banks are more active than multimarket ones in addressing the increased credit demand because their relationship lending approach allows them to evaluate borrowers’ likelihood of default correctly. At the same time, other factors matter, such as bank capitalization, securitization markets, and government subsidies. Banks’ lending strategies can no longer avoid the impact of increased climate risk on their future performance.
Andi Duqi
Chapter 5. The Role of Other Actors in Promoting Post-Disaster Economic Recovery in Partnership with Banks
The international community is constantly bringing to the public attention that disasters are becoming more expensive and are increasing poverty, especially in low and low- middle-income countries. The adaptation finance gap in developing countries is five to 10 times greater than the current international financial aid and continues to widen. Multilateral agencies such as the World Bank have launched several programs aiming at helping countries understand, manage, and reduce natural hazard risks. Various risk transfer mechanisms, such as insurance tools, are available and have proven successful. Many countries have introduced climate strategies and policies. Governments need to actively establish a risk reduction culture, which should incentivize investment in disaster resilience, understand climate projections by working closely with the scientific community, and target humanitarian assistance to the most vulnerable through grants or subsidized loans.
Andi Duqi
Chapter 6. Conclusions
Severe weather hazards pose significant challenges to the economies of many countries, and their impact will be even more significant in the future. Research on the economic consequences of natural disasters suggests that they impact short-term growth, but opinions diverge on long-term outcomes. At the same time, this literature finds that various country-specific factors matter in facilitating post-disaster recovery. While this body of research is vibrant, it has yet to deal adequately with the consequences of severe weather events on banking institutions and potential spillover effects on the real economy. Natural disasters could pose severe threats to banks depending on their area of operations, especially to small institutions in emerging countries. Governments of these countries need to work closely with international cooperation agencies, insurance companies, and the scientific community to multiply funding toward climate change adaptation projects and establish a climate risk reduction culture in their societies.
Andi Duqi
Banking Institutions and Natural Disasters
Andi Duqi
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