Journal of Applied Finance & Banking

Natural Disasters, Local banking, and Recovery lending: evidence from an Italian earthquake

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• Abstract

   

  This paper analyses the differences between local and commercial banks, focusing on credit supply in the aftermath of a natural disaster. Using the Italian earthquake of 2012 as exogenous shock, we investigate whether distinct banking models react differently. The baseline estimation is based on diff-in-diff approach. We show that Cooperative Banks, differently from commercial banks, do not interrupt the credit channel. To corroborate these findings, we also employ panel estimation, incorporating additional explanatory variables. The results are consistent with the baseline, indicating that local banks increased credit supply (recovery lending) in the territories affected by the earthquake, whereas there is no evidence for commercial banks. A series of robustness checks is carried out to bolster the results. Firstly, the sample size is enlarged by including a wider set of municipalities. Secondly, a placebo test is conducted by falsifying the date of the event and a propensity score matching analysis is performed on a control group. Finally, the same analysis is repeated on a random sample of municipalities. The robustness checks provide support to the baseline estimation. In municipalities affected by the earthquake, Cooperative Banks tend to increase loan supply, aiding the economic recovery. This does not emerge for other banks.

   

  JEL classification numbers: G01, G210, G28.

  Keywords: Cooperative Credit Banks, Bank Lending, Financial Systems, Economic Cycles.