Foreign Risk Exposure of U.S. Banks

From a new working paper from the Federal Reserve Bank of NY:

At Issue: Over the last two decades, US banks have built up a strong presence abroad, due to direct lending and the acquisition of local banks in foreign countries. Which are the countries with stronger financial links with American banks? How did the exposure to foreign risk evolve over time? Is the US financial system exposed to a risk of contagion from crises that develop elsewhere in the world?

Findings: The number of US banks with foreign risk exposure decreased from 140 in 1990 to 71 in 2004, following the consolidation of the US banking sector. At the same time risk exposure increased from $355 billion to $1.25 trillion. Foreign activity is dominated by the four “Money Center Banks”. While derivatives arising from cross-border activity now account for 8% of risk exposure, their use is tempered by two trends towards risk reduction. First, exposure shifted away from emerging country and has moved towards Europe and Canada. Second, foreign exposure towards Latin American countries mostly occurs through local subsidiaries, whose foreign liabilities are matched by foreign assets.