Recent banking research (“the Research”) from Accuity, the global financial crime compliance, payments and KYC solutions provider, has revealed that between 2009 and 2016, correspondent banking relationships, where one financial institution provides services on behalf of another in a different location to facilitate cross-border payments, have reduced globally by 25%.
Source & Copyright©2017 - Accuity
This comes despite the fact that global GDP per capita grew during the same period, following the 2008 financial crisis.
Commenting on the findings, Henry Balani, Global Head of Strategic Affairs at Accuity, said, “Correspondent banking represents the cornerstone of the global payment system designed to serve the settlement of financial transactions across country borders. Our Research highlights some important trends in de-risking and its impact on international trade and global banking.” He continued, “The irony is that regulation designed to protect the global financial system is, in a sense, having an opposite effect and forcing whole regions outside the regulated financial system. This matters because allowing de-risking to continue unfettered is like living in a world where some airports don’t have the same levels of security screening – before long, the consequences will be disastrous for everyone.”
The cost of global de-risking
Since the global financial crisis of 2008, regulators have imposed requirements for greater transparency, established higher liquidity thresholds for banks as well as stepping up enforcement actions on institutions that violate anti-money laundering (AML) regulations.
Accuity believe, that the challenges of increased operational costs, competitive and regulatory pressures have driven banks to withdraw from correspondent banking relationships. Historically, these relationships were provided as services to international customers, but this is no longer viable, as banks cannot justify the increased compliance cost associated with offering correspondent banking services to their local customers. As a result, businesses in the regions most affected are struggling to access the global financial systems to finance their operations. Without this access, local banks are forced to use non-regulated, higher cost sources of finance and expose themselves to nefarious actors and shadow banking.
Henry Balani added: “A number of factors have contributed to de-risking, the most important being that the risk / reward balance has become unfavourable for large clearing banks and in response they have taken a country / region risk view in deciding who they can do business with. If we want to reverse this trend and begin to ‘re-risk’, then the ‘antidote’ will require more granular level due diligence and proper risk assessments to provide large clearers with the confidence that they can deal with low risk businesses in high risk jurisdictions.”
Changing correspondent relationships and currency usage
The change in the usage of correspondents/currency varies:
- USD relationships declined by 15% which is either indicative of a concentration in relationships or a reduction in USD dominance
- Euro relationships showing a steeper decline of 23%
- Chinese Renminbi (RMB) correspondent relationships increased by 8% and was the highest growth in correspondent relationships
- Global bank locations in developing economies have also increased by 31% since 2014, largely due to growth in China and APAC
- Number of banks in established global financial centres are in decline.
Balani concluded, “As we see more regulation come into place, global banks can support growth in local businesses by investing in technology that can securely and quickly determine the risk of a transaction in a high risk geography.”
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