Natural disasters and bank liquidity creation in Sub-Saharan African countries: Evidence from banks panel data

Abstract

This paper investigates the effects of natural disasters on bank liquidity creation in sub-Saharan African during the period 1988–2018. Using bank-level data from more than 30 countries, we find that natural disasters affect negatively the liquidity creation in the region. The cumulative effect over the three years following a disaster is economically significant, amounting to a total reduction of 4 % in the average liquidity generated. This impact is mainly channeled through the asset-side activities of banks. We also find heterogeneous impact of natural disasters on bank liquidity creation based on the size of banks, the magnitude of disasters and the income level of countries. Moreover, these effects are mainly observed when disasters strike on a large-scale. On the contrary, there is no significant difference depending on whether or not the disaster is climatic in origin. Additional tests show that foreign ownership of banks as well as monetary policy change do not qualitatively alter our primary findings. These results support bank regulation policies taking into the specificities of banks operating in environments prone to frequent natural disasters. Specifically, we recommend that central banks implement targeted regulatory measures such as stress-testing or resilience programs. As natural disasters are likely to increase in the coming years due to climate change, we suggest that microprudential policies be further strengthened and adapted to incorporate climate change considerations.