Risk in International Banking

Alan C. Shapiro

Journal of Financial and Quantitative Analysis, 1982, vol. 17, issue 5, 727-739

Abstract: This paper differentiates between country risk--the probability that a country will default on its obiigations--and two forms of international banking risk: (1) the extent to which a bank's foreign activities affect the cost of equity capital; and (2) the extent to which a bank's foreign activities affect the probability of bankruptcy. The paper focuses on the latter form of international banking risk.Using Chebyshev's Inequality, it is pointed out that the risk of bankruptcy is influenced by the mean as well as the variance of the return distribution. Consequently, restrictions on the (international) composition of a bank's portfolio may increase rather than reduce the probability of bankruptcy.

Date: 1982
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