Banking Institutions and Natural Disasters : Recovery, Resilience and Growth in the Face of Climate Change

This book looks more closely at how natural disasters impact bank activity and how banks can support economic recovery after a natural disaster. The importance of banks in this context is underscored by increasing regulatory attention on their role in fostering a sustainable future, but also on the risks that climate change poses to bank stability. Humanity has tried to cope with the short- and long-term economic consequences of natural disasters for centuries. However, the severity of these events is constantly increasing in magnitude, due to the alteration of the earth’s climate and the environment. They pose a serious threat to the lives of millions of people especially in less developed countries. At the same time, the international community has acknowledged that weather hazards’ impact and countries’ resilience to them are affected by various socio-economic factors, such as the well-functioning of financial institutions, especially commercial banks. Banks will inevitably adapt their strategies to address concerns arising from climate change. In doing this, the book discusses partnerships with international cooperation institutions, other financial intermediaries, and local governments, so that the green transition ensures an inclusive growth for all, especially the most vulnerable parts of our societies. This book is of interest to researchers, academics, and students of sustainable finance and climate finance. Preface 6 Acknowledgments 8 Contents 9 List of Figures 12 List of Tables 15 1 Overview 16 References 20 2 The Economic Impact of Natural Disasters 21 2.1 Economic Costs of Natural Disasters 21 2.2 What Does Economic Theory Say About the Post-Disaster Growth Path? 27 2.2.1 Neo-Classical Growth Models 27 2.2.2 Models with Endogenous Productivity 28 2.2.3 Input–Output Models and Computable General Equilibrium Models 30 2.3 Empirical Evidence from Emerging and Developed Economies 30 2.4 Country Determinants of Vulnerability and Resilience to Natural Hazards 35 References 39 3 The Consequences of Natural Disasters on Banking Institutions 44 3.1 In Terms of Lower Profitability, Resilience, and Risk, Are Banks Affected by Natural Disasters? 44 3.2 The Regulatory Framework on Bank Exposure to Disaster and Climate Risk 51 3.2.1 The European Context 51 3.2.2 The European Central Bank’s (ECB) Action on Climate Risks 54 3.2.3 The U.S. Approach to the Impact of Climate Risks on Bank Stability 58 3.2.4 Other Stress Tests Conducted by Central Banks and Regulators Around the Globe 60 3.2.5 Why Central Banks Should Include Climate Risks in Their Mandates (and Why Not)? 61 3.3 How Could Banks Integrate Climate Risks into Their Operations? 63 3.3.1 The Criticality of Data Granularity and Models’ Weaknesses 68 References 69 4 The Role of Banks in Promoting Post-disaster Economic Growth 72 4.1 The Theoretical Framework Underlying the Link Between Bank Activity and the Real Economy 73 4.1.1 The Importance of the Institutional and Legal Environment 74 4.1.2 Does the Type of Bank Shareholder Matter? 76 4.1.3 External Financial Dependence, Bank Market Power, and Growth 77 4.1.4 Banking Crises and Bank Bailouts 80 4.1.5 Potential Nonlinearities of the Finance-Growth Nexus 82 4.2 Do Banks Lend More and to Whom After a Natural Disaster? 83 4.2.1 Differences in Post-disaster Lending Behavior Between Local and Nonlocal Banks in the U.S. 86 4.2.2 Empirical Evidence from Cross-Country Studies and Other Economies 90 4.2.3 The Link Between Post-disaster Recovery Lending and Economic Recovery 92 4.3 How Can Banks Incorporate Climate Risks in Their Lending Strategies? 97 References 104 5 The Role of Other Actors in Promoting Post-Disaster Economic Recovery in Partnership with Banks 112 5.1 Supra-National Institutions and Development Banks 112 5.1.1 United Nations Framework Convention on Climate Change (UNFCCC) 113 5.1.2 United Nations Office for Disaster Risk Reduction (UNDRR) 114 5.1.3 United Nations Environment Programme (UNEP) and the United Nations Environment Programme Finance Initiative (UNEP FI) 121 5.1.4 Multilateral Development Banks 124 5.1.5 The International Monetary Fund 130 5.2 The Insurance Market and Innovative Disaster Risk Transfer Mechanisms 134 5.2.1 Catastrophe (CAT) Bonds and Other Insurance Solutions 137 5.2.2 Government-Sponsored Pools for Natural Disasters to Overcome Problems of Market Failure 141 5.3 The Role of the Government in Natural Disaster Resilience and Recovery 142 References 149 6 Conclusions 151 Index 155