Unrest and uncertainty: how social instability contracts bank credit supply

Existing literature provides insufficient evidence on how non-economic shocks affect bank lending. Using social attack incidents as an exogenous shock, this study finds that banks significantly reduce their lending after experiencing shocks. Difference-in-differences estimations reveal that during years with a higher incidence of social attacks, banks with greater risk aversion reduce their lending to a larger extent than their less risk-averse counterparts. These findings reveal a distinct credit supply channel for non-economic shocks that is separate from the channels driven by economic uncertainty or political violence.