Catastrophic Risk and Credit Markets

We provide a model of the effects of catastrophic risk on real estate financing and prices and demonstrate that insurance market imperfections can restrict the supply of credit for catastrophe-susceptible properties. Using unique micro-level data, we find that earthquake risk decreased commercial re...

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Bibliographic Details
Published in:The Journal of finance (New York) 2009-04, Vol.64 (2), p.657-707
Main Authors: GARMAISE, MARK J., MOSKOWITZ, TOBIAS J.
Format: Article
Language:English
Subjects:
Bank loans
California
Credit insurance
Credit risk
Earthquake insurance
Earthquakes
Financial engineering
Financial risk
Impact analysis
Insurance
Insurance markets
Insurance providers
Investment risk
Mortgage markets
Property insurance
Real estate financing
Real estate market
Risk assessment
Risk management
Studies
U.S.A
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Summary:We provide a model of the effects of catastrophic risk on real estate financing and prices and demonstrate that insurance market imperfections can restrict the supply of credit for catastrophe-susceptible properties. Using unique micro-level data, we find that earthquake risk decreased commercial real estate bank loan provision by 22% in California properties in the 1990s, with more severe effects in African-American neighborhoods. We show that the 1994 Northridge earthquake had only a short-term disruptive effect. Our basic findings are confirmed for hurricane risk, and our model and empirical work have implications for terrorism and political perils.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2009.01446.x