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 real estate bank loan provision by 22% in California properties in the 1990s. The effects are more severe 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.