The impact of sudden stops on bank lending: Are there cross-sectional differences?

Using annual financial statements of individual banks operating in East Asia and Latin America, we address the question whether banks are significantly affected by a sudden stop of capital inflows an important source of vulnerability in recent years in these regions. In particular, it is tested for cross-sectional differences in the lending behavior of banks during a sudden stop. In most cases, we find that a sudden stop leads to a reduction in the banks’ sources of foreign funding. The subsequent effects range from increased credit default risk, increased costs of external funding to deposit withdrawals for a particular group of banks. With regard to bank lending, we find evidence that well-capitalized banks with a liquid asset portfolio are better positioned during a sudden stop and play a stabilizing role on the domestic loan market.