Beyond the storm: the crucial role of banks in post-disaster economic growth

Giuseppe Torluccio November 29, 2023

When the fury of nature hits communities, leaving behind a landscape of destruction, the road to economic recovery can be arduous and highly uncertain. In this context, a recent study published in the Journal of Corporate Finance, titled “Natural disasters and economic growth: The role of banking market structure,” sheds new light on an often overlooked aspect: the role of banks in post-disaster reconstruction. The authors, Andi Duqi and Giuseppe Torluccio, respectively Associate and Full Professor of Banking and Finance at the University of Bologna, conducted an in-depth analysis of bank lending dynamics following natural disasters. Analyzing a series of U.S. counties, similar to European provinces, which have been hit by hurricanes and tropical storms, the two authors arrived at surprising and counterintuitive results. 

The heart of the survey focuses on two fundamental questions: do banks increase lending after a natural disaster? And, if so, do all banks behave in the same way? The answer to these questions defies expectations and tips the scales. It turns out, in fact, that counties served by banking institutions with high bargaining power over customers recover more quickly after a disaster caused by a hurricane. This finding is unexpected, since the prevailing literature suggests that greater banking competition should promote growth. 

But why are these areas recovering faster? The market power of banks, indicative of a less competitive environment, is driving these institutions to make more real estate loans to households for property reconstruction, while not increasing commercial loans to businesses or consumer loans. This approach, although it may seem risky, proves effective because of the greater capitalization and profitability of these banks, which can extend credit without violating regulatory capital limits. 

The article offers a narrative and authoritative perspective on how banks with some degree of market power can play a crucial role in supporting post-disaster economic recovery. It also highlights interesting similarities between these institutions and the cooperative banks in Italian communities, noting how both tend to concentrate lending in specific areas and effectively manage riskier loans through their screening and monitoring capabilities. 

This study not only provides vital insights for policymakers concerned about the effects of bank market power, but also opens up new avenues for thinking about how, under certain circumstances, a reasonable degree of bank market power can actually benefit local economies, especially in times of crisis. 

This article is based on
Natural disasters and economic growth: The role of banking market structure
Journal of Corporate Finance
Andi Duqi, Danny McGowan, Enrico Onali, Giuseppe Torluccio