RWP 25-16, November 2025
We use confidential loan-level regulatory data to show that financial constraints can weigh on credit access and employment after a natural disaster at both the local and national level. Banks cut back on lending in disaster areas, particularly to the most financially constrained firms, and these reductions in credit supply lead to larger initial declines and slower subsequent recoveries in employment. Bank profitability is a key driver of this result: Borrowers more reliant on less-profitable lenders obtain fewer loans and pay higher interest rates following disasters. These less-profitable lenders also respond by providing fewer loans and charging higher interest rates to financially constrained borrowers in other unaffected areas. We show that these financial spillovers ultimately distort employment growth. Our findings suggest a potential role for policies that improve access to credit in the aftermath of natural disasters.
JEL Classifications: G11, G12, G21
Article Citation
Howes, Cooper, Johannes Matschke, and Jordan Pandolfo. 2025. “Financial Constraints and Employment Dynamics following Natural Disasters.” Federal Reserve Bank of Kansas City, Research Working Paper no. 25-16, November. Available at External Linkhttps://doi.org/10.18651/RWP2025-16
The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.