Impact of extreme weather episodes on the Philippine banking sector – Evidence using branch-level supervisory data

Abstract

There is growing recognition that natural disasters and severe weather-related events pose risks that can potentially and unintentionally affect the financial performance of the banking system. This study provides further indication that severe weather conditions have an impact on the financial performance of smaller banking units. The paper first constructs a regional quarterly rainfall damage index (RDI) based on data from weather stations across the country. A regional branch-level database from supervisory reports is then compiled based on 11,000 banking units from the Bangko Sentral’s (BSP) Branch Regional Information System (BRIS). Using the dynamic panel generalized method of moments (GMM), we find evidence of a deterioration in branch-level loan growth and loan quality as savings and time deposit liabilities contract and nonperforming loans surge following extreme rainfall events from 2014 to 2018. These are particularly evident in regions most vulnerable to severe rainfall episodes and to branches of universal and commercial banks as well as those of rural and cooperative banks. However, the overall negative impact on profitability seems to eventually taper off. These findings are robust across different specifications and alternative estimation methods such as fixed effects and panel vector autoregression estimations.