Banking on Foreigners: The Behavior of International Bank Claims on Latin America, 1985–2000

The significant rise in foreign bank claims observed during the 1990s, following their steep decline during the 1980s debt crisis, reignited interest in understanding the behavior of these flows. This paper analyzes changes in foreign bank claims on the Latin American private sector over the period 1985-2000. We find that banks transmit shocks from their home countries (where banks' headquarters are located) and that changes in claims on individual host countries (those that receive claims) are correlated with aggregate changes in claims on other countries. However, over time, we observe that foreign bank claims have become less responsive to external factors. Also, we present evidence that the sensitivity of foreign bank claims to host factors diminishes, as banks' aggregate exposure rises. Finally, we find that foreign bank claims react more to positive than to negative host shocks and are not significantly curtailed during crises. Copyright 2005, International Monetary Fund