Friday, December 03, 2021

How Bad Are Weather Disasters for Banks?

Kristian S. Blickle | Sarah N. Hamerling | Donald P. Morgan


Not very. We find that weather disasters over the last quarter century had insignificant or small effects on U.S. banksí performance. This stability seems endogenous rather than a mere reflection of federal aid. Disasters increase loan demand, which offsets losses and actually boosts profits at larger banks. Local banks tend to avoid mortgage lending where floods are more common than official flood maps would predict, suggesting that local knowledge may also mitigate disaster impacts. Key words: hurricanes, wildfires, floods, climate change, weather disasters, FEMA, banks, financial stability, local knowledge


Policymakers around the globe are seriously considering the risks that climate change could pose to banks and the financial systems they anchor. Increasingly extreme weather is one possible channel (NASA (2005), Van Aalst (2006), Harvey (2018)). The destruction and economic disruptions caused by hurricanes, wildfires and other natural disasters may spillover to banks, particularly small, local banks square in the "eye" of the storm. If loan losses spike, or if customers move away over the longer run, bank solvency could be threatened. Indeed, the banking panic of 1907 was triggered by the earthquake and fire that ravaged San Francisco in 1906 (Odell and Weidenmier, 2005). We size up this disaster channel by studying how banks fared against disasters past. We study FEMA-level disasters over 1995-2018 and county-level property damage estimates from SHELDUS (Spatial Hazard Events and Losses Database for the United States).

Bank exposure to damages in a county is proxied by its branch presence there. We look at hyper-local banks operating in just one county and at more diversified banks operating across multiple counties. We estimate regression models relating disaster exposure to standard bank performance and stability measures - loan losses, income, return on assets, capital strength, and default risk (Z-score) over the short and medium run (up to five-years).

To account for correlations in areas prone to disasters and bank performance, we saturate the models with fixed effects and control for time-varying county characteristics. When we consider all FEMA disasters, we find generally insignificant or small effects on bank performance and stability. In particular, loan losses and default risk at local banks do not increase significantly. Charge-offs at multi-county banks increase but the impact is very small.

Moreover, not all effects are bad; income of multi-county banks increase significantly with disaster exposure. Extreme weather is expected to become more extreme as the globe warms, so we also look separately at the most damaging (90th percentile) of disasters. We again find that losses at larger (multi-county) banks are barely affected and their income increases significantly with exposure. For local banks, we do find more negative stability effects from extreme disasters. However, even these are not sufficiently large to threaten bank solvency.

In part this may be due to offsetting effects. Local banksí income also increases after these more severe disasters. The modest effects we find may be surprising, so we explore three factors that might account for banksí resilience.

The first and most obvious candidate is FEMA disaster aid. That aid, which can be substantially, primarily flows to households to help cover uninsured losses but it could buttress banks 1 indirectly by supporting borrowers and the local economy. FEMA aid to individuals and households by county is not public, so we investigate any mitigating effects indirectly using two strategies. In the first, we expand our disaster set to include destructive weather events that did not trigger a FEMA declaration and compare the impact of such ordinary disasters to those of FEMA disasters. We find that, for given damages, non-FEMA disasters are not notably worse for local banks, suggesting FEMA aid does not explain their resilience. We find similar results in the second test where we exploit discontinuities in FEMA declaration coverage (for a given disaster) along state borders.

A second, endogenous, factor that might mitigate disaster effects on banks is increased demand for loans. Households and businesses may need credit for rebuilding or to smooth out temporary income disruptions. In addition to alleviate the disaster impacts on borrowers, new "recovery" lending may help offset losses on loans already on the books. Consistent with that premise, we find that lending increases significantly after disasters, though only at multi-county banks.

Local knowledge is a third possible mitigating factor. Banks located closer to their borrowers have been found to harbor knowledge of both borrowers and local risk that more distant lenders may lack. We extend that idea by investigating if local banks superior geographic knowledge helps them avoid areas where disaster risks are more frequent than expected based on common knowledge. To that end, we digitize all FEMA flood zone risk maps for 2019 and merge them with HMDA (Home Mortgage Disclosure Act) data. We find that local banks reallocate mortgage lending from census tracts where flood risks seem understated relative to the FEMA maps (given recent flooding experience). We do not observe such behavior at multi-county banks.

Our main findings are generally consistent with the few papers that study the bank stability effects of disaster


Humans Are Doomed to Go Extinct

Another unfalsifiable prophecy

Cast your mind back, if you will, to 1965, when Tom Lehrer recorded his live album That Was the Year That Was. Lehrer prefaced a song called “So Long Mom (A Song for World War III)” by saying that “if there's going to be any songs coming out of World War III, we’d better start writing them now.” Another preoccupation of the 1960s, apart from nuclear annihilation, was overpopulation. Stanford University biologist Paul Ehrlich’s book The Population Bomb was published in 1968, a year when the rate of world population growth was more than 2 percent—the highest in recorded history.

Half a century on, the threat of nuclear annihilation has lost its imminence. As for overpopulation, more than twice as many people live on the earth now as in 1968, and they do so (in very broad-brush terms) in greater comfort and affluence than anyone suspected. Although the population is still increasing, the rate of increase has halved since 1968. Current population predictions vary. But the general consensus is that it’ll top out sometime midcentury and start to fall sharply. As soon as 2100, the global population size could be less than it is now. In most countries—including poorer ones—the birth rate is now well below the death rate. In some countries, the population will soon be half the current value. People are now becoming worried about underpopulation.

As a paleontologist, I take the long view. Mammal species tend to come and go rather rapidly, appearing, flourishing and disappearing in a million years or so. The fossil record indicates that Homo sapiens has been around for 315,000 years or so, but for most of that time, the species was rare—so rare, in fact, that it came close to extinction, perhaps more than once. Thus were sown the seeds of humanity’s doom: the current population has grown, very rapidly, from something much smaller. The result is that, as a species, H. sapiens is extraordinarily samey. There is more genetic variation in a few troupes of wild chimpanzees than in the entire human population. Lack of genetic variation is never good for species survival.

What is more, over the past few decades, the quality of human sperm has declined massively, possibly leading to lower birth rates, for reasons nobody is really sure about. Pollution—a by-product of human degradation of the environment—is one possible factor. Another might be stress, which, I suggest, could be triggered by living in close proximity to other people for a long period. For most of human evolution, people rode light on the land, living in scattered bands. The habit of living in cities, practically on top of one another (literally so, in an apartment block) is a very recent habit.

Another reason for the downturn in population growth is economic. Politicians strive for relentless economic growth, but this is not sustainable in a world where resources are finite. H. sapiens already sequesters between 25 and 40 percent of net primary productivity—that is, the organic matter that plants create out of air, water and sunshine. As well as being bad news for the millions of other species on our planet that rely on this matter, such sequestration might be having deleterious effects on human economic prospects. People nowadays have to work harder and longer to maintain the standards of living enjoyed by their parents, if such standards are even obtainable. Indeed, there is growing evidence that economic productivity has stalled or even declined globally in the past 20 years. One result could be that people are putting off having children, perhaps so long that their own fertility starts to decline.

An additional factor in the shrinking rate of population growth is something that can only be regarded as entirely welcome and long overdue: the economic, reproductive and political emancipation of women. It began hardly more than a century ago but has already doubled the workforce and improved the educational attainment, longevity and economic potential of human beings generally. With improved contraception and better health care, women need not bear as many children to ensure that at least some survive the perils of early infancy. But having fewer children, and doing so later, means that populations are likely to shrink.

The most insidious threat to humankind is something called “extinction debt.” There comes a time in the progress of any species, even ones that seem to be thriving, when extinction will be inevitable, no matter what they might do to avert it. The cause of extinction is usually a delayed reaction to habitat loss. The species most at risk are those that dominate particular habitat patches at the expense of others, who tend to migrate elsewhere, and are therefore spread more thinly. Humans occupy more or less the whole planet, and with our sequestration of a large wedge of the productivity of this planetwide habitat patch, we are dominant within it. H. sapiens might therefore already be a dead species walking.

The signs are already there for those willing to see them. When the habitat becomes degraded such that there are fewer resources to go around; when fertility starts to decline; when the birth rate sinks below the death rate; and when genetic resources are limited—the only way is down. The question is “How fast?”


U.S. EPA allocates billions in water funding from infrastructure law to states

The U.S. Environmental Protection Agency on Thursday released over $7 billion to state governments and tribes to upgrade drinking and waste water systems, the first allotment of clean water funds that was approved in the bipartisan infrastructure bill signed into law last month.

The installment is part of $44 billion in clean water funds that will be dispersed over five years through a federal-state partnership program. The Biden administration has touted the benefits for states that will flow from the $1 trillion infrastructure law, which President Joe Biden signed on Nov. 15 after months of congressional negotiations.

The $1 trillion in infrastructure spending features what the EPA describes as the "single-largest investment in U.S. water infrastructure ever."

Over half of the $7.4 billion in state revolving funds (SRFs) that the agency will allocate to states for 2022 will be available as grants or principal forgiveness loans that are meant to make it easier for underserved urban and rural communities to access.

"Billions of dollars are about to start flowing to states and it is critical that EPA partners with states, Tribes, and territories to ensure the benefits of these investments are delivered in the most equitable way,” said EPA Administrator Michael Regan.

He urged that the money be used to "correct longstanding environmental and economic injustices across America."

EPA Assistant Administrator Radhika Fox will soon issue national program guidance from the EPA’s Office of Water to help agencies best use the billions that will become available.

SRFs, which provide low-cost federal financing, have been used for decades by states to invest in their water infrastructure but many vulnerable and poor communities facing water challenges have not historically accessed their fair share of funds. Regan said he wants the new flow of money from the infrastructure bill will correct the disparities.

California, Texas and New York - the biggest states - will receive the largest share of SRF funds.


South Australian environment minister says he wants to quit because he's sick of dealing with 'crazy lefty activists' and 'Greta Thunbergs' who spout 'myths and nonsense'

I sympathize. The total lack of reality contact among the Green/Left gets very wearing

The South Australian environment minister wants out of his portfolio because he's sick of dealing with 'crazy leftie activists' and 'Greta Thunbergs'.

David Speirs told a private Liberal Party fundraiser on Monday night that he liked his portfolio but needed a 'refresh' because he was worn down by climate activists.

The 36-year-old lost a deputy leadership vote last week but asked those attending the fundraiser to 'lobby' Premier Steven Marshall on his behalf for another post.

'The crazy leftie activists, they do wear you down after a while so I think every few years you need to see a bit of a refresh because there's only so many times you can deal with the Greta Thunbergs of South Australia,' he said, according to the Adelaide Advertiser.

He said the SA Government was doing positive, concrete work on climate change such as moving to renewable energy, but activists tended to spout 'nonsense'.

'I think there's a lot of noise and crap around climate change because all the ills of the world are put in the climate change basket by the left of politics. There are a lot of myths and nonsense,' he said.

He said while countries like India and China needed to vastly reduce their emissions, Australia - which emits comparatively little pollution - could still show leadership in practical ways.

Shadow environment minister Susan Close said Mr Speirs comments were unfit for someone running the environment portfolio and his 'disparaging comments proves' he should not be minister.

Mr Speirs responded in parliament on Tuesday when questioned about the fundraiser speech. 'I may have said something like that, absolutely,' he said.

'But I believe I was making a comparison between the practical response to the great challenges of climate change and the poster-waving activism which doesn't lead to outcomes, such as gluing oneself to Flinders Street.'

In October, eight Extinction Rebellion protesters were arrested after gluing themselves to Adelaide CBD streets during peak hour.

'I'm not sure you get your message across when you disrupt and inconvenience so many people who potentially support your cause,' SA police commissioner Grant Stevens said of the protest




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