Customers, banks, and natural disasters

We examine the impact of natural disasters (NDs) on customer capital and bank risk. Using a large panel dataset from 4066 banks in the Eurozone over the period 2000-2021, we find that NDs negatively affect customer capital through a deterioration of the guarantees provided. This leads to an increase in bank risk characterized by a decline in the quality of banks’ assets and a rise in non-performing loans. Furthermore, these results vary according to the type of NDs and bank-specific characteristics (i.e., capitalization, dependence on deposits, and size). This article, therefore, provides evidence of the mechanism connecting natural disasters directly and indirectly to financial stability. This article sheds further light on banks' exposure to climate change risks.