Effect Of Natural Disasters On Banking

Natural disasters, be it Earthquakes, Floods, Hurricanes, Tornados or Fires cause havoc in whatever city they touch, destroying everything in sight and taking millions of lives. Apart from the destruction, it unleashes on daily life, Natural disasters also affect the flow and working of businesses and banks in various ways.In this article, we study the effects of these disasters solely on banking.

A natural disaster for one directly disrupts the working of these firms through the numbers of lives it takes and the physical damage caused to their equipment and infrastructure. While such physical and direct damage is very well highlighted by the media, they often overlook the indirect damage caused by the impact on the firm’s transaction partners including customers, suppliers etc. When banks thus suffer physical damage, it will indirectly affect their funding such that they will not be able to provide funds at the same interest rates as before. This is a huge hassle for the firms and customers and other clients under them who will have to shift to an undamaged bank, a process which involves substantial costs and time. Further, a survey conducted after the Tohoku earthquake in Japan showed that while around 62.5% of firms in the Tohoku area suffered direct damage post the earthquake, around 36.5% were also negatively affected by the damage caused to their suppliers, 44% of the damage caused to their customers and 11.4% expressed their dismay regarding the fact that their bank being their most important source of lending, was unable to operate their branch. Finally, 4.8% concluded that their affairs were indeed very adversely affected by the damage caused to their bank as a result of the earthquake.

Disasters like the Kobe Earthquake reduced the lending capacity of the damaged banks from which firms borrow, thus imposing financial constraints on them that adversely affected their trade, investment and volume of exports. These disasters can, for instance, wipe out any information held at these banks regarding their borrower’s creditworthiness, accumulated over the years, thus destroying their ability to process loan applications and originate loans to them. Further, damage to these borrower firms themselves can deteriorate bank loan portfolios and thus reduce their risk-taking capacity.

While the economic recovery of these damaged institutions post-disaster is a long drawn process, it is not impossible and there are many precautions that can be taken to ensure the smooth working of firms despite damage to them or their financial sources.  Modest government support and policy-making for one can play a huge role to ensure that these disasters do not affect bank borrowing or increase their probability to go bankrupt. Further, it is also important to ensure the working of financial intermediaries to prevent any kind of financial constraints put on firms in the wake of a natural disaster. This will allow them to carry on with the capital spending and exports without glitches. Finally, to conclude, it is important for the government to intervene in the loan markets in case of such massive disasters and also introduce policies that reduce credit crunches caused by them.