Bank lending networks and the propagation of natural disasters

Abstract

We study how syndicated lending networks propagate natural disasters. Natural disasters lead to an increase in corporate credit demand in affected regions. Banks meet the increase in credit demand in part by reducing credit to distant regions, unaffected by disasters. Capital constraints play a key role in this effect as lower-capital banks propagate disasters to unaffected regions to a greater extent. While shadow banks offset the reduction in bank credit supply on term loan syndicates, they do not offset the loss in credit line financing. As a result, corporate credit in unaffected regions falls by approximately 3%.