How Does Market Competition Affect Banks' Adaptation to Changes in Flood Risks?

Abstract: This article examines the interplay between market competition and banks' strategic responses to projected long-term changes in flood risks, using data from the home-equity credit market post-Hurricane Harvey. Our work reveals that banks updated their risk models based on exposure to the hurricane, with those in competitive markets less likely to adopt cautious lending practices. It also explores the concept of strategic complementarity, showing that banks' adaptive behaviors are influenced by their competitors. These findings shed insights on how market forces may influence the way banks adapt to evolving risks.

Keywords: banks; market competition; climate change; risk management;

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Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Richmond Fed Economic Brief

Publication Date: 2024-02

Volume: 24

Issue: 06