When dark clouds roll in over the global economy, foreign banks shed their assets in the US and Canada.

The last three major macroeconomic downturns have come with upticks in the sales of North American bank properties by overseas owners, according to Dealogic data.

London-based HSBC’s [LON:HSBA; HKG:0005] decision to sell its Canadian banking business to Royal Bank of Canada [TSE:RY] in a USD 10bn deal announced 29 November stirred an otherwise quiet banking M&A market for that country.

It also grooves with a recent historical trend. Bank selloffs in North America by European and Asian financial groups all jumped in the three years following a seismic economic event. The dot-com crash that started in March 2020, the global financial meltdown of 2007-8, and Covid’s onset in early 2020 all coincided with an elevated level of departures from the US and Canada.

The reg stuff

Besides a weakening economy, the two most recent eras have another important ingredient in common: regulatory uncertainty.

The 2007-8 financial crisis originated within the US sub-prime banking sector and elicited a muscular regulatory response on the part of the federal government.

The regulatory environment that has taken hold in the US since then has had a cumulative effect of driving foreign bank investors away, said Kamal Mustafa, founder and Chairman of the banking advisory company Invictus Group. Most recently, regulators have cooled on “de novos,” or new banks, which is always a scarecrow to potential foreign investors, Mustafa said.

“When regulators push de novos, that’s when the foreign money jumps in,” he said. “When they’re not pushing de novos, foreign buyers think there’ll be too much regulator interference.” Bank charter applications have trended downward since 2020, according to an S&P Global Market Intelligence report.

That is the year the coronavirus and related recession spread and the first year in the recent elevation in deal value for foreign bank divestitures in North America.

Canada or US?

The overseas appetite for US banks remains high and awaiting the Federal Reserve to settle its interest rate policy, Mustafa said. Florida is a market flush with Latin American capital that would seek out banking assets under the right conditions, he said.

Observers expect the US and Canada to see more foreign deal activity across each other’s common border.

In fact, since 1995 Canadian banks have spent nearly twice as much acquiring US-based banks (USD 96bn) than those on its own soil (USD 50bn), according to Dealogic.

Canadian banks will continue to look to the US for M&A targets because the fragmented nature of the market offers attractive growth opportunities, Ron Stokes, strategy and transaction partner for EY Canada, wrote in an email.

Bank transactions in Canada overall heightened recently but rising interest rates and inflation could cool the market, Stokes said.

Soft factors can have a hard impact too. Canada’s banking environment is more attractive to foreign buyers because its culture is more tradition-bound to civility than US management style, which is more cutthroat and aggressive for growth, said Mustafa.

“They have unwritten rules of good behavior, and we don’t,” he said.