Commerzbank gathered together a group of bankers and corporates to discuss how emerging markets are being cut off from the global correspondent banking network.
- Christof Gabriel Maetze, global head of financial institutions/cash and international business management, Commerzbank (chair)
- Gernot Bruch, head of export & project financing, Linde AG
- Rudolf Putz, head of trade facilitation programme (TFP), EBRD
- Karlheinz Gampl, head of group finance, MAN-Diesel & Turbo SE
- Makram Sader, secretary general, Association of Lebanese Banks
- Michael Faller, head of finance, Primex-Stell
- Axel Summer, head of financial institutions and sovereigns, RZB International
- Peter Gubbins, managing director, GTR
Maetze: This is a great opportunity to have a chance to exchange a number of views on trade finance today. I take a banker’s view, but it is also very important to get the ‘other side’ of the equation. When I look at the trade finance business, which I have done for the last 24 years, I would say that we are seeing waves of regulatory development hitting this business. During the financial crisis, everybody was saying: ‘Basel rules need to be strengthened’ and capital was the big regulatory wave, then all of a sudden, the famous leverage ratio came out: how much space does a certain business occupy on your balance sheet? Today, anti-money laundering, know your customer, know your customer’s customer, etc, are the hot topics of the day. This is something we should talk about – the topic for our roundtable is ‘unbanked’ banks.
You really have to ask yourself: ‘If so many regulatory waves are hitting certain business lines, and there seems to be a risk of being fined, why stay in business?’ One topic we are going to discuss today is that a number of people in the industry have decided not to stay in the business because it is too costly. I would be delighted if you could share some of your views on these topics and developments. Your perspective might be slightly different than the one we take.
Bruch: I think this is an economic perspective that commercial banks, as with any other companies or enterprises, have to take on the business they are in. I also think that these regulations certainly are necessary to a certain extent. They are important, and, as such, they are good. Perhaps nowadays we are at the point where we, together as an industry, regulators, are kind of over doing it and this is having unintended consequences. We certainly would have to take a prudent approach to avoid increasing regulations repeatedly. However, we also need to educate regulators that these unintended consequences are already happening and that there must be a further, developed approach to this issue.
Summer: If you go back 10 years, the role of the regulator was very different from what it is today. After the financial crisis, regulators really became quite powerful. This has led to certain rules and regulations which have created unintended consequences for the financial industry. Customers – and staff – are leaving the financial systems and entering into relations with other financial providers, which are not regulated but more flexible. Although they offer similar banking services, they do not have to comply with regulations required from banks or regulated financial institutions. Considering payments, this creates problems for us and for the regulators, because these payment streams are leaving the transparent system.
Coming back to what Christof said, it is important to have industry support towards the regulators, to show them what the consequences are.
Faller: Does the regulator ask the industry for that? That is the question. With regards to know your customer, we received questions from all of our banks. Every month we received requests from another bank. Why wasn’t it pooled by one institution, like Schufa or something? That way all the banks would know their customers and can make the request there. No. It is work for us to respond to all of these application forms, etc. All of them are different.
Maetze: The banks, among themselves, are going to do things through a central KYC register. This will most likely be associated with Swift. This is because after a number of years where we tried to do everything bilaterally we realised that it would be wise to do it on a multilateral basis. This is going to start early next year. As far as I know, there is as yet no solution for anything outside the banking industry or people who are outside of the Swift system.
Putz: If I look at the title of the roundtable, ‘unbanked banks’, we have seen that these regulations and unintended consequences are burdens for big banking groups and for smaller banks in the emerging markets.
Under our trade facilitation programme, which has seen us work with hundreds of banks worldwide for more than 15 years, we have seen a dramatic decrease in the number of international banks providing trade finance facilities to our partner banks, to smaller banks, especially in the emerging markets. In terms of Mediterranean countries, some banks have recently said: ‘Well, we still have some correspondent banks in Italy and Spain, but can you help us find a correspondent bank in Portugal because we haven’t found a bank in Portugal that would still be able and willing to invest into due diligence and to establish a line for us because it is expensive.’ I think the biggest unintended consequences that these regulations have created are a burden of cost and labour which banks are not willing to bear anymore.
German banks still follow their clients. My corporate colleagues in Germany are in a very good position in Germany. If you were in other countries – the US for example – you would find it is very difficult to find a local bank that still provides you with trade finance – unless it’s profitable for the bank.
Some corporates and exporters say they cannot find a commercial bank that is ready to do small and medium-sized transactions. It has a cost issue. It is not a secret but international banks tell me today: ‘If I don’t earn with the financial institutions in Eastern Europe at least US$50,000 or US$100,000 a year I’m not ready to establish a line anymore because it doesn’t cover my cost.’
Faller: Which is probably one of the unintended consequences additionally, because the burden to store the data, to document, to do your KYCs and so on, has significantly been raised over the last couple of years. I think, as Christof said, the financial industry is adapting to that, because everybody is filing the KYCs.
We are also adapting ourselves to this.
Maetze: We are absolutely aware of this.
Faller: Let me say we are also suffering because we are filing the same things as other banks and institutions. One of the consequences is all of this is becoming much more expensive. Banks are hiring, as corporates probably will in the future, compliance officers and administrative staff to investigate further and deeper. The primary aim only creates cost, with no additional benefit or profit which then makes the product more expensive than it was. This finally leads to the fact that institutions are leaving certain business lines because they are not justified anymore.
Gampl: We have had a change in the business attitude over the last 10, 20 years. Thus, you see the implementation of compliance departments. I think there is a change in the mindset against money laundering, against tax evasion. We are now in a more transparent industry, a more transparent world. The world grows together and global trade will increase. Therefore, we have to live, to some extent, with such regulations. If the business for banks is not profitable, then they need to increase the margins. The smaller banks also have to accept that. In my opinion, I will always find a bank who will do the business.
Our company is in a more fortunate position because our deals are usually bigger ones. I can understand that medium sized companies do have a problem or that they have to pay higher premiums for that. However, given the competition here in Germany, and comparing the premiums and the margins with other countries in the world, I think that Germany is still in a very favourable position.
Summer: I believe that there will be a squeeze on smaller institutions concerning certain business lines. The competition that we see today is still there but I think that we have now reached a point where this will shift because the administrative burden and the costs incurred will make institutions simply exit some business lines. It does not mean that they will not offer banking services anymore, but they will be diminished to a certain extent and much smaller than we have seen in the past.
Sader: We recently visited the United States regulators to discuss with the US Treasury State Department and Congress Commission not to add requirements on our correspondent banks pushing them to de-risk our banks because we are operating mainly in a highly risky environment. In Syria we have shrunk our total balance sheet by 80%. In Iraq, we are now under pressure because of the new problem of Isis. Everybody wants us to operate prudently. We, as Lebanese banks, are very prudent. But the cost of compliance is becoming heavier.
Maetze: Lebanon is a trading nation. The hinterland of your country, as we say in Germany, is challenging. Our feeling would be that we have done business with you and you understand that your reputation is so important for you. I would, for example, come to the conclusion – through a number of business partners we have had for many years – that I trust that you are doing the right things. However, it does not help me when I have to comply. We know many families behind banks in your country, we know the top management. We have this feeling that we understand exactly what they are doing. In the past, this was the main basis of all business. Now, I have to document and ask for a lot of paper trails and proof, etc, because I still do believe you are as concerned about your reputation as we are. In my opinion this is the great change that has happened. I think the same would apply for Commerzbank.
Look at MAN. We have dealt with you for a long, long time and we know your internal procedure. We understand how it is. Now people say: ‘Can you give proof? I do not know if this really helps the growth of world trade. At the same time, G20 in Brisbane says that we need to stimulate the economy and enhance world trade a little bit, so I have to admit I am slightly confused.
Sader: It is very important to give all the required information. We are doing this with all of our corresponding US and EU bankers. It is working. You have to answer the questions and give full information. You may not have access to all kinds of intelligence information, but you have to communicate what you know. This idea of a KYC register is very good.
Maetze: As exporters, do you perceive increased regulation in this form as a tremendous increase of cost? Or, because of the size of your transaction does it not really matter? Is it only a fraction of the total cost of the transaction?
Bruch: For the time being, we have not perceived this. I think we are in a similar situation to what Karlheinz just mentioned about MAN. I also think that corporates are probably not very well aware of the dilemma we are in as a trade finance community or industry. This is why there is not a lot of activity on the part of the corporate industry in contravening these regulations. Maybe this is kind of the same story as with the leverage ratio. On the outset all of this Basel III regulation and so forth was perceived by the corporate industry as a bank issue. It took some while for corporates to understand that this can have a cost impact on trade finance, on deals, and can impact their cross-border business as well. I think we are kind of in the same situation. It will have an impact on global trade if we do not act prudently. Maybe the likes of MAN, Linde, GE, are the last ones to be affected, but I am convinced it will affect us. I see the dilemma we are in. On the one hand, I think we can all agree that trade is prone to money laundering activities because of the sheer size of trade. You have a huge amount of legitimate transactions where you can easily hide. It is very difficult to detect the illicit transactions. Thus, I am convinced that there is a need for a customer screening, a customer due diligence process. I do not say that the current rules are the perfect ones, but I think there have to be rules.
The question for me is: if all can agree to this point, how can we then ensure that this activity – which adds no value to what a bank is doing – be done in a very effective and not so burdensome way? The only way for me is either we convince regulators that there are unintended consequences and that there is some alleviation, maybe because regulations are overdone. On the other hand, to gain scale, banks probably must share the utility to do KYC in a more effective way.
Gampl: Yes, I think you are right. I think you can transfer money easily from one part of the world to another. There are so many transactions going on. You have to filter the illegal ones. This is very, very difficult. We are doing a kind of check on our contracts, whether we are dealing with customers, agents, etc. We have a huge compliance department that is involved here. We also feel much more comfortable, with a countercheck on the banking side, that we are dealing with banks that are really doing the business the right way. I think this has substantially changed in the last years. Of course we can discuss whether the regulations are the right ones. I think this will be a kind of adaptation. Some things might be over-regulated.
Faller: We are a small company. We are not as big Linde or MAN. We are thankful for the things the banks are doing for us in regard of knowing the customer. Sometimes we do not agree but we have so many sanctions. We have sanctions against Iran, Iraq and Russia. For a small company like us it is too difficult and too expensive to know all the sanctions and all the rules. We try our best, but we are not convinced that we do it perfectly, as big companies
and banks can.
Maetze: I believe that sanctions add to the problem.
I have understood that, apart from an additional cost burden by following additional anti-money laundering, procedures, being able to understand whether any given transaction is doable under the sanction regime or not is really costly. As you can imagine, it is especially important for us in Germany because trade with Russia is very big. In certain other countries it was not that important because there was never that much trade flow. However I would say that a large share of German industry has business relations with Russia. This has really complicated matters. This adds to my earlier point. At one point you ask yourself if it is really worth doing. If the bank is too small the cost for the individual KYC – and on a country level, if there are sanctions, is the wallet of the country and amount of business I can do worth the effort and risk I am taking? This is exactly what we are discussing, because some have decided that it is not.
Bruch: I have just checked the order intake. We are doing business with more than 150 countries. We are a supplier of investment goods and spare parts. I think these are needed goods, so we do not see big obstacles in our business. Especially with the spare parts sector, we also have small-scale business. We do not feel that it has become much more complicated. If regulations are too costly, the banks in those countries have to decide if they would rather go in that direction or be out of business. The decision has to be made by the banks. If global trade increases you will find banks. This is an evolutionary process. It will not happen overnight. In terms of the attitude of doing business the correct and right way, it takes some time before everybody has it in their minds. Then, more and more banks will agree to be transparent and to participate in global trade.
For us, I think all the fines and compliance issues we had in Germany changed the mindset of the people substantially. I think if banks are interested in such business, they also have to change their mindset and be transparent. If the regulations are too costly, I think there will be a new business which will advise smaller companies about how to deal with the regulations, with the sanctions. This is because not every company in the industry can afford an export control department which checks all sanctions. I feel comfortable with the department we have implemented – compliance plus export control. For smaller companies it might be much more difficult and expensive. However I think such types of advisory companies will be established to also advise smaller companies on how to do business. As I said before, when banks have to do their job as we have to, I also feel much more comfortable.
Sader: The regulator wants us to do the job. The client wants us to do the job. It presents us with big overhead costs. Some regulators, including in the US, are asking to review the de-risking policies, especially for exchange houses.
Putz: I agree that the problem will not go away. I think the regulations will stay. Where we, perhaps as the EBRD, could play a role, together with the associations and international organisations, is in standardisation. I think regulators need to get together. It will be a big problem if every country has different regulations and every bank has to deal with different processes.
Maetze: Do you believe this is possible? Just look at the implementation of Basel III in the European Union and Dodd Frank in the United States. Is there any chance for standardisation?
Putz: I hope so because for me it is the only way. I am a big fan of standardisation. A lot of things at the EBRD only work if we standardise them.
We have to raise awareness. I think this roundtable should be a starting point for doing so. It is not sufficient to address a problem. Solutions should be promoted. If we accept that regulations will not go away, I think standardisation is the key to the solution. I see that many here agree.
Maetze: One recent issue was noteworthy. A few weeks ago the Financial Action Task Force (FATF), the top organisation that deals with everything related to anti-money laundering, issued a note saying: ‘FATF clarifies a risk-based approach case by case, not wholesale de-risking.’ For the first time, which is interesting, the regulator has come out with a piece and said: ‘Don’t overdo it. This is not what was intended with our regulation.’ This is helpful. Why? Because you can pass this on internally and say, ‘Look guys. A problem has been recognised internationally which it has not been before.’ I think it is remarkable because they also made a statement which I find very important. ‘This does not imply a zero-failure approach.’ As you all know – and you mentioned it as well – people have this impression of: ‘Better say no to a business if you are not 100% sure.’ They are saying: ‘Give every piece of business that is coming up a chance. Review it on a case-by-case basis, ensure compliance but do not get out lightly.’ To me, this shows that basically the discussion we are having here has reached a political dimension. They would not have issued this communiqué if there was not a problem.
Sader: This is a very sensitive issue. It is very important to have, in any regulation, what we call due process instead of judiciary review.
Putz: I think this is an ongoing discussion. The regulator does not know exactly what to do. I think banks also have to address this issue and discuss this with the regulators.
Maetze: I have been doing international business for a while. I think most of the regulation coming out is designed by people in highly developed countries who assume fully functioning and modernised banking systems. To me this is really strange. In 24 years I have asked myself: where is the voice of the other markets in the world? If you take Basel III as an example, if you are a developing economy, this will hurt you because of the technical complexity and underlying assumptions.
I do not see a large number of countries in the Basel committee discussions. I do not see them in this discussion. I do not see them at FATF. They are simply not there. But, they are a little bit concerned when, later, regulations come out and they figure out that it is almost impossible for them to comply because they are not equipped for it. Do we have an answer to this? In the last 24 years I have not seen one.
Putz: The answer is clearly no because banks in emerging markets are often not strongly represented in international committees and organisations. They often do not even have an active banking association. In many EBRD countries of operation, they do not even have a regional ICC office. I can give you a nice example. Many foreign banks have closed their trade finance lines for Ukraine. Even with a 100% guarantee from the EBRD, they are not ready to do the transactions because the cost of compliance – even with the 100% guarantee – would not make it worthwhile. We have a strange situation. Even big banks in Ukraine are struggling today, because international banks say: ‘I don’t want to take risks and I don’t want to bear the cost. So I am just not doing business.’ I must say that luckily enough we still have some correspondent banks in bigger European countries. But exporters from outside of the bigger European countries are really struggling to find a bank which is still ready to confirm a letter of credit from Ukraine – even with 100% EBRD cover.
Summer: To miss those voices in those countries which are not developed, the danger for us, particularly here in Europe, is that we will probably not hear them because they will turn to other players. They will turn to Southeast Asia and the regions where the economic centre of gravity is shifting. We are not growing in Europe and, though we do not know it, we will probably not grow for the next couple of years. I think there is quite some risk, which is attributed to the financial system, that these countries and institutions will increasingly turn away saying: ‘Okay, we probably can’t fulfil these standards required there but there are countries which are able to deliver and cater to our needs with their products and services which have lower standards.’ Already we see the story in China and Africa. It will detach Europe more and more from certain development in the future. We will probably never hear these voices really loud here.