Regulation and costs see big banks spurn smaller players
Larger banks are turning away payments business from smaller banks as regulatory and cost pressures bite. More than two-thirds of delegates in yesterday’s compliance session, Big Banks and Small Banks, said they had been victims of de-risking by larger banks; 68 per cent said larger banks had withdrawn from doing business with smaller banks. In addition the audience poll found that 67 per cent of respondents had experienced reduced services from their larger correspondent banks during the past three years.
Chee Kin Lam, group head of compliance at DBS Bank, said he was not surprised by the numbers. “We are all in the business of producing returns,” he said. “Returns are affected by capital overheads, derivatives requirements and the overhead of ‘operationalising’ AML [anti-money laundering] and KYC [know your customer] regulations.” The industry needed to discuss what is causing the exit from certain sectors of correspondent banking and how much of that exit is caused by regulations related to AML and KYC, for example, he added.
The withdrawal of business has been “rather surprising”, said Ferry Robbani, head of international banking and financial institutions group, of Indonesian institution Bank Mandiri. “In the past three years, many of our correspondents have retracted some of the basic services they have been providing to us over the past 30 years,” he said. Such services include cheque clearing and bill collection; “very basic services”, said Robbani. Despite being a small bank, Mandiri is used to stringent regulatory requirements in the cities in which it operates, such as Hong Kong, Singapore and London. Given this context, Robbani said it was surprising that banks had retracted services, which was having an impact on the bank’s ability to serve its customers. “Payments have been rejected from walk-in customers, for whom we have very strict due diligence processes. If our primary correspondent bank retracts business, who do we deal with? If we have to turn to tier two and three banks, that will bring a new set of risks to the industry,” he said.
The industry was in a “fair bit of a mess” regarding the issue of compliance, said Andrew Yiangou, managing director global transaction banking solutions, global institutional banking, National Australia Bank. “I don’t agree with much of what I see going on. In all walks of life it seems people want to go with the big guy and love kicking the small guy,” he said. “What amazes me is the behaviour of the bigger global banks – although it is not their fault,” he said. He was concerned that the response of larger banks to the imposition of fines for AML and KYC violations was to “kick out the little guy”.
There was a place for smaller banks in a larger correspondent bank’s portfolio, he argued, because such banks enable them to diversify concentration risk and in many cases, the cost of service of smaller banks cost is better than for larger banks. “Smaller banks require no reciprocity arrangements and deliver higher margins, taking up less management time. There are many arguments of why we should be banking the little guys,” he said.
Speaking for the “big guys”, Jack Jared, managing director, business compliance and risk head at Citi, said banks are required by regulators to do “an enormous amount to be sure they have the capacity to find a needle in a haystack”. It is a big expense and is a fixed cost as the same procedures are required for small, medium and large banks. “I think a proper discussion must take place about what the tolerance of failure should be, what a risk-based approach should look like and also the proportionality of penalties for failure,” he said.
The panellists identified a disconnect that often exists between regulators and law makers. Lam said the enforcement of AML and KYC rules was forcing banks to reduce their levels of tolerance of failures. “In addition to regulation, there needs to be an understanding of banks’ business models. The big banks don’t touch the SMEs we deal with in our jurisdictions, but we are often pushed by governments to lend to such companies. If I send a USD payment for an SME to a big bank to clear, an operational overhead kicks in,” he said. “There needs to be clarity about a policy to allow these relationships to exist or to strip out costs in an intelligent way.”
Robbani agreed there was a disconnect and said there was often little guidance from regulators in different countries for banks to abide by. “There is definitely a disconnect in countries such as Indonesia between what regulators say to institutions and what governments tell us to do. Sometimes the Indonesian Government wants us to transact business in certain countries – often for humanitarian reasons – but we have to abide by Ofac, Fed and ECB rules, which makes it difficult for us.” He said there should be more open discussions between governments and regulators to address the concerns.