The effect of foreign lending on domestic loans: An analysis of US global banks

- We use confidential data to study the effect of foreign lending on domestic loans.
- We instrument for foreign lending using bank exposure and foreign GDP growth.
- A 1% increase in foreign lending leads to a 0.6% growth in domestic loans.
- When capital is tight, foreign lending comes at the cost of domestic loans.
- Bank lending exhibits similar complementarities as real investment of multinationals.

This paper examines the effect of foreign lending on the domestic lending for US global banks. We show that greater foreign loan growth complements, rather than detracts from, domestic commercial lending. Exploiting a confidential data (FFIEC 009) on international loan exposure of US banks, we estimate that a 1% increase in foreign office lending is associated with a 0.6% growth in domestic commercial lending, suggesting complementarity across these lending channels. However, when capital raising is tight during the Global Financial Crisis of 2008, we find that foreign lending did come at the expense of domestic lending.