Using annual financial statements of banks from 11 countries in East Asia and Latin America, we investigate whether a strong domestic banking system and foreign bank participation help to insulate emerging market economies from the adverse effects of sudden stops by stabilizing the domestic loan supply. In most cases, we find that sudden stops are associated with reductions in the domestic lending volume in the order of 10%-15% of GDP. Moreover, banking sectors with higher capitalization and foreign bank presence tend to attenuate the adverse effects of sudden stops on the domestic lending volume and strengthen, therewith, the affected economies.
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