Sudden stops of capital inflows, macroprudential policies, and bank systemic risk: An international investigation

Using data from 1724 listed banks across 43 nations, we investigate the effect of sudden stops of capital inflows on bank systemic risk. Empirical evidence demonstrates a significant increase in bank systemic risk as a result of sudden stops. In terms of impact mechanisms, we find that sudden stops heighten bank asset risk and contribute to the collapse of asset price bubbles. Furthermore, we examine whether the implementation of macroprudential policies can alleviate the effects of sudden stops on financial stability. Our findings demonstrate that macroprudential policies concerning capital, credit, and liquidity can effectively alleviate the heightened systemic risk associated with sudden stops. The regression results still hold after a series of robustness tests. Our research connects sudden stops of capital inflows with bank systemic risk and provides a policy reference for the regulatory agencies aiming to identify and prevent externally imported financial risks.