IDB

We suggest that foreign banks may represent a trade-o ¤ for their de-veloping country hosts. A portfolio model is developed to show that a more diversi\u85ed international bank may be one of lower overall risk and less susceptible to funding shocks but may react more to shocks that a¤ect expected returns in a particular host country. Foreign banks have become particularly important in Latin America where we \u85nd strong support for these theoretical predictions using a dataset of individual Latin Ameri-can banks in eleven countries. Moreover, we \u85nd no signi\u85cant di¤erence between the size of the response of foreign banks to a negative liquidity shock and a positive opportunity shock: in both cases the market share of foreign banks in credit increases