During the last decade Colombian international financial conglomerates (IFCs) expanded abroad, significantly increasing their geographical complexity. This paper analyzes the effect of changes in geographical complexity on the level of bank risk. We used the z-score as a measure of bank risk and as a measure of geographical complexity, the number of countries where a Colombian IFC has bank subsidiaries. Our results suggest that complexity is associated with higher levels of banks' risk, due to the Colombian expansion overseas to countries with large GDP co-movements and lower regulatory qualities. In addition, we found some evidence that complex banks increase their demand for external funds when the internal cost of capital increases. Moreover, local monetary policy affects the relationship between banking complexity and bank risk.

How does the expansion of domestic banks in international markets affect the bank lending channel of monetary policy? Using bank-firm loan-level data, we find that loan growth and loan rates from international banks respond less to monetary policy changes than domestic banks and that internationalization partially mitigates the risk-taking channel of monetary policy. Banks with a large international presence tend to tolerate more their credit risk exposition relative to domestic banks. Moreover, international banks tend to rely more on foreign funding when policy rates change, allowing them to insulate better the monetary policy changes from their credit supply than domestic banks. This result is consistent with the predictions of the internal capital markets hypothesis. We also show that macroprudential FX regulation reduces banks with high FX exposition access to foreign funding, ultimately contributing to monetary policy transmission. Overall, our results suggest that the internationalization of banks lowers the potency of the bank lending channel. Furthermore, it diminishes the risk-taking channel of monetary policy within the limit established by macroprudential FX regulations.