INTERNATIONAL LOANS AND THE RISK-RETURN BEHAVIOR OF COMMERCIAL BANKS: SOME EVIDENCE FROM THE CAPITAL MARKET

Jacky Y. C. So and Richard T. Nyerges

This study examines investors' perception of the international debt problem and its impact on risk. Risk is subdivided into domestic and international components. Both the "domestic risk" and "international risk" of U.S. multinational banks are assessed by a multi-factor model. It is found that the "domestic risk" of U.S. multinational banks is negatively affected by their foreign loan holdings for one of the three sub-periods. This result, however, becomes insignificant after the announcement of the loan rescheduling request of the Mexican government. It is also found that the "diversification effect" is not statistically significant for the U.S. multinational banks within two of the three sub-periods tested.