Foreign Banks Retreat from Lending to U.S.

Lending in the U.S. by foreign banks has started to contract.

Total loans and leases by foreign-related banks fell at an annual pace of about 0.75% in the first week of March, according to the most recent data from the Federal Reserve. It was the third week in a row in which loans contracted — and the first contraction since 2013.

The contraction of foreign loans comes at a time when loan growth by U.S. banks has been slowing. Year over year loan growth by the 25 largest U.S. banks fell to around 3.35% in early March, down from 7.18% a year earlier. Overall loan growth by commercial banks has fallen to around 4.28%.

For most of last year, foreign banks were growing loans at a faster pace than their U.S. counterparts. That changed in the final weeks of 2016, when foreign bank loan growth began declining rapidly.

Rising interest rates and a strong U.S. dollar may explain a good part of the contraction. A combination of hikes by the Federal Reserve coupled with money market fund reforms has been forcing banks to pay more for short-term dollar funding. Three-month Libor recently climbed above one percent for the first time since the onset of the financial crisis, while the U.S. dollar is sharply higher against many foreign currencies compared with a year ago.

Foreign banks may also be shrinking their U.S. lending operations while they await greater clarity about the direction of U.S. tax and trade policies.

Another likely factor: heightened capital requirements. A rule requiring foreign banks to form separately capitalized intermediate holding companies took effect last summer. Many foreign bankers and foreign regulators have complained that the rules are too onerous and make lending to the U.S. too expensive.

Regardless of the cause, the decline in lending by foreign banks could add to worries that the overall slowdown in loan growth could be a drag on the U.S. economy.