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Working Paper

Tracing Out Capital Flows: How Financially Integrated Banks Respond to Natural Disasters

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Multimarket banks reallocate capital when local credit demand increases after natural disasters. Using property damage as an instrument for lending growth, we find credit in unaffected but connected markets declines by a little less than 50 cents per dollar of additional lending in shocked areas. However, banks shield their core markets because most of the decline comes from loans in areas where banks do not own branches. Moreover, banks increase sales of more-liquid loans and they bid up the prices of deposits in the connected markets. These actions help lessen the impact of the demand shock on credit supply.
Topics
Financial networks
10.15.2015ISSN 2573-7953 WP 14-12ROriginal Paper WP 14-12DOI 10.26509/frbc-wp-201412r

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Cortés, Kristle Romero, and Philip E. Strahan. 2015. “Tracing Out Capital Flows: How Financially Integrated Banks Respond to Natural Disasters.” Federal Reserve Bank of Cleveland, Working Paper No. 14-12R. https://doi.org/10.26509/frbc-wp-201412r