-- Climatic Change, 176 (9), 125

-- with Jingtian Wang and Mark Sanders

We study the local economic impacts of extreme weather events and the role of local finance in economic resilience. We use data on the physical intensities of extreme wind and precipitation events for 284 prefecture-level cities in China between 2004 and 2013. We estimate impulse response functions using a bias-corrected method of moments estimator to capture the dynamic responses of affected cities up to 5 years after such events. We find that extreme precipitation events depress the growth of local GDP per capita for multiple years, while the negative effects of storms vanish after the first year. We then use this model to measure the economic resilience of cities to extreme weather events. Regressions of economic resilience on indicators of the local financial structure suggest that cities with higher levels of debt are less resilient. Moreover, the presence of state-owned commercial banks appears to be instrumental to regional economic resilience. As extreme weather events are expected to become more frequent and severe due to climate change, our results inform the emerging debate about regional economic resilience to weather-related shocks.

Working Paper

The economic costs incurred by extreme weather events are substantial and increasing. In this study, we demonstrate how community banks – a type of financial institution with strong local ties and customer relationships – mitigate these costs at the local level. We use an event study model to demonstrate that US counties with higher community bank market shares experience fewer employment losses through extreme weather events. We then use bank-level analyses to demonstrate the mechanism – the small business credit supply. Community banks maintain their lending following extreme weather events, while other banks reduce it. These findings provide novel evidence on how local financial institutions strengthen economic resilience through extreme weather events. As policymakers develop strategies to mitigate the effects of extreme weather events, local finance may be a solution. 

Natural hazard shocks (such as natural disasters, extreme weather or climate events) have significant negative impacts on economic activity. This paper reviews the recent empirical literature on how banks are affected by such shocks, and how banks mediate the economic consequences to households and the real economy. After conceptualizing the theoretical transmission channels between the real economy and the banking sector, the review proceeds in two steps. First, it synthesises the existing literature on the direct effects of natural hazard shocks on bank stability, bank profitability, and credit supply. Then, the critical role of banking in economic recovery is analysed, including research on spillovers into unaffected regions through the banking system. Negative direct effects of natural hazard shocks on banks can be significant but are often transitory. Banking systems in less developed countries appear more vulnerable and are less able to maintain credit supply under adverse conditions. Banks that are better capitalised and that have incentives to support affected economies contribute to economic resilience. Several avenues for future research are identified, focusing on the specific characteristics and policy levers that enable the banking system to contribute to a resilient economy in the face of climate change and physical climate risks.

Work in Progress

SMEs are commonly regarded as important members of economic and civil communities. Due to their special characteristics, they are also particularly vulnerable to the effects of exogenous shocks such as natural hazards. In this paper, we investigate the relationship between the financial structure and banking relationships of small- and medium-sized enterprises (SMEs), and their resilience towards climate-related extreme weather events. Using firm-level panel data on SMEs in several European countries as well as fine-grained weather data on storms, extreme precipitation, and extreme temperature events, we employ a triple-difference approach to assess the firm-level impacts of such events depending on a firm’s pre-event leverage and the structure of its banking relationships. We consider banking relationships that differ in terms of banks’ business models, ownership types, and capitalization. We expect our findings to be informative for policy-making, firms, and banks in the face of progressing climate change.

In this paper, we examine how the entrepreneurial nature of a community can impact resilience through extreme weather events. In particular, we demonstrate communities with higher shares of smaller, younger firms have fewer employment losses through extreme weather events in the United States. We utilize a modified event study model to estimate the effect of SME employment share on local employment growth through such events. We find higher employment shares of young and small enterprises reduce employment losses. We contribute to the literature by highlighting SMEs’ unique resilience mechanisms in disaster recovery efforts, which underscores their broader economic impact.