How do banks respond to violence?

Abstract

In this article, we investigate how banks are exposed to violence and how they respond to it. Specifically, we investigate how non-performing loans and customers’ demand for liquidity react to violence. Then, we assess the impact of violence on banks’ liquidity and loan maturity. For this purpose, we mobilize data from 1222 banks located in 88 countries among the most exposed to violence in Africa, Asia, and the Middle East from 1997 to 2021. Our analysis shows that the existence and intensity of violence lead to an increase in non-performing loans and cash withdrawals by banks’ customers. Furthermore, violence leads to a reduction in credit volume through the increase of the cost of credit and preference for very short-term loans. Finally, in response to violence, banks diversify their sources of income to offset the decline in lending activity and preserve their profitability. Overall, our study documents the impact of violence on banks.