There is a growing recognition that natural disasters and severe weather-related events pose risks that can potentially and unintentionally affect the stability of the banking system. This study confirms the effects of severe weather conditions on the banking sector performance. 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 BSP’s Branch Regional Information System (BRIS). Using Dynamic Panel Generalized Method of Moments (GMM), the results show deterioration in branch-level loan growth and loan quality as savings and time deposit liabilities contract and non-performing loans surge following extreme rainfall events from 2014 to 2018. These are particularly evident in regions most vulnerable to extreme rainfall episodes and to branches of universal and commercial banks as well as of rural and cooperative banks. However, the overall negative impact on profitability eventually tapers off. These findings are robust across different specifications and alternative estimation methods such as fixed effects and Panel Vector Autoregression estimations.
