(Revised August 15, 2024)

The frequency and severity of natural disasters have increased over the past few decades. Credit from private banking sources is a critical source of funding following a natural disaster. New post-disaster mortgage and home loan credit is two orders of magnitude larger than the level of federal disaster assistance provided to disaster-affected residents. US Interstate bank deregulation during the 1980s and 1990s led to larger, nationally diversified banks, and a decline in the number of local community banks. Economic theory suggests that community banks may have a greater incentive, but a lower capacity, to lend to a region following a destructive event such as a natural disaster. We test whether there are differences in post-disaster credit allocation and regional redevelopment based on the concentration of local banking at the time of a natural disaster. We isolate the causal role that banking institutions have on the supply of credit by instrumenting for the composition of local and national banking institutions in a region at the time of a natural disaster using state-level bank deregulation. Overall, we find that there is less new credit in disaster regions for about five years following a natural disaster. The reduction in credit is greater in regions with a higher concentration of local banking. Regions with a higher concentration of local banking are also characterized by somewhat weaker redevelopment as measured by wage and population growth.