Recurrent capital inflows pose important challenges for authorities in emerging market economies seeking to preserve financial stability. Raising interest rates to dampen imbalances that could arise from capital flows can also attract more capital inflows and accentuate appreciation pressures....

We investigate if financial stress in countries where international banks are headquartered is a major driver of banking outflows from emerging market economies (EMEs). We find that when financial stress measured by sovereign or bank CDS spread or corporate bond spread increases, international...