ABSTRACT
This essay explores the hypothesis that international banks tend to assume excessive exposure to insolvency. It builds on a framework developed in an earlier paper (Guttentag and Herring, 1984) that shows why the financial system tends to become increasingly vulnerable to major shocks during long periods when no such shocks occur. The focus in this essay on a particular sector of the financial system is not only a compelling illustration of the general thesis but also of interest in its own right because international banking has assumed strategic importance in the financial disorders of the 1980s.
