► We study the extent of international diversification gains in banking. ► We find substantial risk-return gains stemming from bank activities abroad. ► Concentration of bank activities within geographic regions partly eroded these gains. ► A mean–variance portfolio optimization model shows a home bias in banking. ► Suboptimal allocation of bank assets is more severe in emerging market countries. This paper studies international diversification in banking, exploiting a bank-level dataset that covers the operations of 38 global banks and their subsidiaries overseas during 1995–2004. The paper finds that banks with a larger share of assets allocated to subsidiaries in emerging market countries were able to attain higher risk-adjusted returns. These gains were somewhat reduced by the concentration of bank subsidiaries in specific geographical regions, which is typical of the observed international expansion strategies. The paper also finds a substantial home bias in the international allocation of bank assets relative to the results of a mean–variance portfolio optimization model.