TY - JOUR
T1 - Do non-damaging earthquakes shake mortgage lenders' risk perception?
AU - Xu, Minhong
AU - Xu, Yilan
N1 - Publisher Copyright:
© 2022 Elsevier Inc.
PY - 2023/1
Y1 - 2023/1
N2 - This study examines how banks respond to earthquakes that convey seismic risk salience but do not cause damage, i.e., noticeable non-damaging earthquakes (NNDEs). Using evidence from California, we find loans more likely to be denied or sold after increased NNDEs. Banks with fewer assets, more diversified branching markets, or stronger sales capability relied more on securitization to transfer the perceived seismic risk. We show evidence that banks likely learned about the NNDEs through personal experience and local news. The effects of NNDEs persisted up to three years. Meanwhile, the NNDEs only caused moderate and temporary collateral devaluation but did not increase the observable default risk. Thus, banks' responses most likely resulted from the increased risk salience of future damaging earthquakes during the mortgage term. Our findings call for reevaluations of the heuristics in banks' risk-perception updating and have implications for designing more efficient disaster risk-sharing mechanisms in the financial market.
AB - This study examines how banks respond to earthquakes that convey seismic risk salience but do not cause damage, i.e., noticeable non-damaging earthquakes (NNDEs). Using evidence from California, we find loans more likely to be denied or sold after increased NNDEs. Banks with fewer assets, more diversified branching markets, or stronger sales capability relied more on securitization to transfer the perceived seismic risk. We show evidence that banks likely learned about the NNDEs through personal experience and local news. The effects of NNDEs persisted up to three years. Meanwhile, the NNDEs only caused moderate and temporary collateral devaluation but did not increase the observable default risk. Thus, banks' responses most likely resulted from the increased risk salience of future damaging earthquakes during the mortgage term. Our findings call for reevaluations of the heuristics in banks' risk-perception updating and have implications for designing more efficient disaster risk-sharing mechanisms in the financial market.
KW - Bank lending
KW - Disaster risk-sharing
KW - Earthquake risk
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U2 - 10.1016/j.jeem.2022.102760
DO - 10.1016/j.jeem.2022.102760
M3 - Article
AN - SCOPUS:85142725323
SN - 0095-0696
VL - 117
JO - Journal of Environmental Economics and Management
JF - Journal of Environmental Economics and Management
M1 - 102760
ER -