Payments: where have all the correspondents gone?
At the recent G20 meeting in Germany, Financial Stability Board (FSB) briefed leaders on its efforts to arrest the decline in correspondent banking relationships.
FSB also presented the results of a survey of more than 300 banks in 50 countries, supplemented by Swift payments data, which showed that the number of correspondent banking relationships continues to decline globally. The decline is pronounced for US dollar and euro transactions.
Swift data show that the number of active correspondent banking relationships declined by 6% across all currencies between 2011 and 2016. The biggest percentage decline in relationships was recorded in Eastern Europe (-16%), followed closely by Europe (-15%). Oceania experienced a 12% decline, while the Americas (excluding North America) fell by 8%.
At the global level, the decline in the number of active correspondents has not resulted in a lower number of payment messages or a lower underlying value of the messages processed through Swift. In fact, the number of payment messages increased between 2011 and 2016. This suggests the correspondent banking business is concentrating, with countries and banks relying on fewer correspondent banks.
FSB says this may lead to longer payment chains with more intermediaries processing the same payment. “The countries where banks are most affected by exits of foreign correspondent banks tend to be small economies or jurisdictions for which the compliance with standards for anti-money laundering (AML) and counter-terrorist financing (CFT) is insufficient or unknown,” it says in a statement.
No single factor is responsible for the decline in relationships, according to FSB, which cites industry consolidation, reduced profitability, changing risk appetites of correspondent banks and more stringent regulations related to AML, CFT and sanctions as factors.
The G20 is concerned about the decline in the number of correspondent banking relationships because in affected countries it may limit the ability to send and receive international payments or may drive payments underground. This could have a negative effect on trade, growth, financial inclusion, financial stability and the integrity of the financial system.
FSB has implemented a four-point plan to address the decline. It covers:
- Further examining the dimensions and implications of the issue.
- Clarifying regulatory expectations, including guidance from the Financial Action Task Force and the Basel Committee on Banking Supervision.
- Domestic capacity building in jurisdictions that are home to affected respondent banks.
- Strengthening tools for due diligence in correspondent banks.
FSB’s findings are consistent with the results of analysis undertaken by the Centre for Global Development (CGD), released in December last year. This found a 10% decline in the volume of correspondent banking, mostly to very poor countries.
CGD is concerned about this trend because it says correspondent banking relationships are critical to businesses in poor countries that lack the credit they need to create jobs. “To get access to this credit, they need local banks to have easy connections to large international banks. The results of the FSB report highlight the constraints faced by businesses, especially in poor countries, when it comes to establishing a banking relationship,” CGD states.
CGD’s research paper – “The Impact of Anti-Money Laundering Regulation on Payment Flows: Evidence from Swift Data” – says the past 15 years has been characterised by “unprecedented” levels of attention on AML and CFT.
“Following the ﬁnancial crisis and several high proﬁle cases of sanctions violations, the international banking sector has been under scrutiny. The result has been a resurgence in the number and size of AML-related enforcement actions ﬁled by regulators.” Within this environment, there are growing concerns, says the CGD about the “chilling” eﬀect on cross-border economic activity as banks limit their exposure to high-risk clients or jurisdictions…
This is an excerpt. The full article is available in the September 2017 issue of the Banking Technology magazine. Click here to read the digital edition (it is free!).