**Table 6: Estimates of disaster episodes on NPLs by disaster type**

|Disaster type|Volcanic|Wildfre|Storm|Extreme Temp|Earthquake|Landslide|Drought|Flood|
|---|---|---|---|---|---|---|---|---|
|0 year|-0.93|0.12|0.07|0.18|-0.40|-0.47|0.10|-0.03|
||(1.11)|(0.47)|(0.19)|(0.30)|(0.62)|(0.71)|(0.33)|(0.23)|
|1 years|-0.01|0.84*|0.17|0.72|-0.07|-0.11|0.26|0.03|
||(0.43)|(0.49)|(0.27)|(0.44)|(0.68)|(0.76)|(0.42)|(0.30)|
|2 years|0.65**|0.50**|-0.03|0.29|0.24|0.83*|0.22|0.02|
||(0.21)|(0.23)|(0.23)|(0.25)|(0.35)|(0.46)|(0.29)|(0.19)|
|3 years|-0.28|0.29|0.06|0.29|-0.08|0.87|0.53*|-0.10|
||(0.66)|(0.37)|(0.33)|(0.35)|(0.40)|0.54|(0.30)|(0.26)|
|Country FE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Time FE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|

The table displays point estimates for the effect of climate-related natural disasters on NPLs by disaster type, using episodes associated with an official declaration of state of emergency. Standard errors(in round brackets) are two-way clustered by country and time. Significance levels: *0.10, **0.05, ***0.01.

# **5.2 Other banking sector variables**

Beyond the effects on bank asset quality, we also find that severe climate and environmental related natural disaster episodes may have an impact on several other key banking sector variables, such as net interest margin, capital adequacy, credit to the private sector and liquidity-to-deposit ratio(table 7). First, such disaster episodes are associated with increases in net interest margins, a widely accepted measure of financial intermediation efficiency: on impact after an episode with multiple types of disasters, the net interest margin increases by 0.18 percentage point on average, decreasing financial efficiency. This effect may be due to the change to market structure and concentration caused by disasters, or else to disruptions in operations, which reduce bank efficiency. Further, disaster episodes seem to be associated with an increase in capital adequacy for one definition of severe disaster. One year after an episode with multiple types of disasters, the ratio of regulatory capital to risk-weighted assets increases by 0.38 percentage point on average, with increases over time. This result is consistent with the findings in Schuwer et al.(2019) that banks increase their risk-based capital ratios after a disaster relative to unaffected banks to strengthen their buffer against future income shocks and mitigate bankruptcy risks.5 Climate and environmental related disaster episodes do not appear to cause an overall contraction of bank credit to the private sector. In fact, we find the opposite to be true: 1-3 years after an episode associated with an official declaration of emergency, the cumulative increases in private credit-to-GDP is estimated to be between 1 and 1.5 percentage points on average. There are a few potential explanations for this results: Schuwer et al.(2019) find that banks actually increases new lending to non-financial firms after a severe disaster, i.e. they do not decrease their exposures to non-financial firms through reduced lending, but through other strategies to reduce existing exposures to non-financial firms, such as loan sales or securitization. Moreover, government ownership of banks has been a large and pervasive phenomenon around the world, especially in EMDEs. State-owned banks are perceived to play crucial roles such as mitigating important market failures and achieving specific social and policy objectives. Hence, they may be directed by the government to channel credit to affected areas and sectors for specific policy objectives 5Our results on capital adequacy vary with the definition of severe disaster, so they should be taken with caution.

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