The shocks of natural hazards on financial systems
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The shocks of natural hazards on financial systems Xia Chen1 · Chun‑Ping Chang2 Received: 20 July 2020 / Accepted: 22 October 2020 © Springer Nature B.V. 2020
Abstract Using panel data consisting of 116 countries, this research investigates the effects of natural hazards on financial systems, including banking system, insurance system, and stock markets. Considering the moderating effects of financial risk, we introduce the interaction between natural hazards and financial risk and also analyze the heterogeneity of income level. Our main conclusions are as follows. (1) Though natural hazards do not significantly influence the banking system directly, they do impact the banking system through financial risk. The moderating effects of natural hazards on the banking system through financial risk are significantly negative. (2) The impacts of natural hazards on the insurance system are dynamic and last over a long period, while the moderating effects of natural hazards through financial risk are significantly negative. (3) The effects of natural hazards on the stock markets and the moderating effects through financial risk are significantly negative. (4) The negative effects of natural hazards on the financial system through financial risk are higher in low-income countries than those in high-income countries. From these results, we offer policy implications such as establishing a complete economic system and lowering the financial risk. Keywords Natural hazards · Financial system · Moderating effects · Fixed effects model JEL Classification F30 · Q54
1 Introduction Natural hazards have the ability to significantly destroy human capital and economic development in a country (Wen and Chang, 2015), resulting in poverty and deprivation in the short run as well as leading to poverty traps in the long term (Carter et al. 2008). Strobl (2012) employs a wind field method to examine how natural hazards influence macroeconomic development, presenting results in which output falls by 0.83 percentage due to hurricane strikes. In addition to macroeconomic effects, a large quantity of evidence shows * Chun‑Ping Chang [email protected] 1
School of Economics and Management, Changsha University of Science and Technology, Changsha 410114, Hunan Province, China
2
Shih Chien University, Kaohsiung, Taiwan
13
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Natural Hazards
that natural hazards have greatly impacted modern economies (Kabisch et al. 2016; Auffhammer, 2018). As financial institutions, including the banking system and insurance system, as well as financial markets exert a powerful impact on economic development, they are an important part of the modern economy in both developing and developed countries (Levine, 2005). Čihák et al. (2012) hold the view that financial development occurs when financial instruments, markets, and intermediaries mitigate, and they develop several methods to measure financial institutions and markets. Moreover, if the level of financial development in a country is high, then when a natural disaster occurs, i
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