Finbarr Bermingham reports from a new reality being faced at Sibos in Singapore.
They say you can prove anything with statistics, so when trying to examine the much discussed decline in correspondent banking, the ICC’s annual Global Survey is a good place to start. Of 482 respondents from 112 countries, 46% said they had experienced termination of correspondent banking relationships over the previous 12 months due to issues around anti-money laundering (AML) and Know Your Customer (KYC) regulations.
An additional 27% of those surveyed said they had experienced terminations where there was “no evidence of suspicion or non-compliance with anti-financial crimes regulation”. The main regions to have experienced this trend were Africa, Russia and the CIS, with some 37% reporting that India and China had been impacted to at least some extent.
At Sibos 2015, this was one of the main topics of discussion. And given the technical nature of the event, it is unsurprising that the conversations were peppered with reams of statistics. At one straw poll, among a sizeable auditorium filled with bankers and regulators, 67% of those gathered said they’d been declined business by “big banks” over the past three years (with the assumption that the big banks in question had previously been happy to work with their smaller counterparts). 68% of those polled said that the services that had previously been available to them had now been pared back, to more basic, less fulfilling offerings.
Not only are correspondent banking networks decreasing, the size of the teams still delivering the service are shrinking and transforming too. “Everyone has been downsizing – asking people to do more with less. The old days of having a dedicated relationship manager for all the banks are gone. There are dedicated relationship managers for the bigger banks, but for the smaller ones there are fewer, or none at all,” Andrew Yiangiou, managing director in the transaction banking team at National Australia Bank told the aforementioned audience.
Another point of view is that in some institutions, the levels of resources remain the same, but they’ve been reallocated to respond to a more pressing regulatory environment. “Go back 10 years and an organisation has 100 resources, the majority would be in business development and a minority in supporting roles such as risk management and compliance. What’s happened? That hundred has been redistributed. We now have very many more people focused on risk management activity: operational, compliance, AML. There are fewer people in direct business development roles,” Alan Verschoyle-King, global head of sales and client management at BNY Mellon told GTR at the event.
Pointing the finger
So why is correspondent banking on the wane? There are two main directions in which to point the finger. The first is a matter of pure economics. Over a coffee in Hong Kong a number of months back, a now departed regional head for HSBC told GTR that it simply wasn’t worthwhile maintaining relationships in every single country and that they’d prefer to do everything centrally. “Thailand, Korea, Indonesia – we’re not making any money there, even with correspondent banks, so why bother?” was his off-the-cuff take on things.
The same rationale was used by Jack Jared, head of compliance, correspondent banking at Citi, when addressing a panel at Sibos. “The perception is that there’s no risk appetite,” he said. “But it’s a fixed cost: the same cost for a small, medium or a large bank. We exited product lines because we couldn’t bring them up to the standards of what we want to offer on a global basis. Banks are still responsible for their own processes, so we end up with double the costs.”
The second main reason is a regulatory one, and this is perhaps the one which explains the sharp decline over recent years. Banks have been scared stiff by the penalties handed out by the likes of the Office of Foreign Asset Control (OFAC) in the US and the growing number of KYC and AML regulations coming online. It’s often theoretically cheaper and easier to stick to markets and customers you know, rather than take a risk – which could turn out to be expensive – on one that you have less knowledge of.
“Whatever business you’re in, as soon as you take the client onto your books, you’re making a statement, you know your client: KYC. The issue then becomes how can you demonstrate this? What are you doing to understand their business and strategy? How can you be sure when you’re processing a transaction on their part it’s a transaction you expect to see? You need to know their physical footprint, ownership structure, any politically-exposed persons in senior positions. We have to demonstrate that in a way that any of our competitors do. So our challenge is to make sure we have the right people and technology in place, and the actual correspondent banking processing systems to make sure wherever there’s a transaction we wouldn’t expect to see, it’s flagged up,” says Verschoyle-King. He adds that BNY Mellon has actually grown the number of banks it works with within its network, but admits that “there’s a slightly different profile in terms of geographies and industries”, saying the bank now focuses on “top-tier financial institutions”. Which brings us nicely to the next point: the overall impact of declining correspondent banking.
Head in the sand
As with most areas of business, the larger the player, the fewer issues they have when trying to raise money. Even as this story is typed, giant commodity trading houses Vitol and Trafigura are announcing multi-billion dollar lending facilities, despite the huge downturn in the market, and the dreadful outlook ascribed to it by most analysts. The same applies in the correspondent banking world: if you’re the largest bank in Brazil, it’s unlikely that you’ll struggle to find a US partner with which to bank. If you’re a bit part player in Senegal, however, the game suddenly becomes trickier. And the ultimate loser in all of this is the SME. Large corporates will always have access to finance, wherever they are in the world. But starve the smaller banks around the world of access to the global trade finance network and small businesses don’t stand a chance.
To cite the ICC again: “Overall it was reported that 45.75% of proposed trade finance applications had been submitted by SMEs, 39.63% by large corporates and 14.62% by multinational companies. Many of these trade finance proposals were declined by banks. Of all the declined trade finance proposals, over half (53%) were submitted by SMEs. By way of contrast, 79% of large corporates had their trade finance proposals approved.” It’s a concern expressed recently to GTR by Steven Beck, the head of trade finance at the Asian Development Bank (ADB) – one of the institutions becoming more and more relied upon to plug these gaps, as commercial banks retreat, despite having initially been set up as an infrastructure and development financier. “We’re concerned that the termination of correspondent banking relations may exacerbate trade finance gaps, isolate developing countries from an ability to trade, and therefore inhibit growth and job creation. SMEs are a big part of that story. This is a concern and something that we’re trying to understand better through research and discussion with banks, companies and others involved in trade,” he says.
This situation is clearly accentuated in riskier regions of the world and we’re left with a very dangerous situation for the financial sector. Western banks are simultaneously de-risking, shedding themselves of balance sheet operations in perceived riskier parts of the world. So where will businesses in such markets turn for financing? Most likely to less regulated channels. Some call them “dark pools of finance”, others “shadow banking”. But the implication and ominous overtones of both are clear: these are less regulated and transparent. They’re patronised by businesses deemed too risky to bank by mainstream financial houses, and going by some of the studies based on the shadow banking system in China and the vigour with which the sitting government has attacked it, they pose great risk to the wider economy.
“If you want to do trade without correspondent banking, I don’t know what the better alternatives are,” Bart Claeys, head of KYC compliance services at Swift says in an interview at Sibos. “That’s why the industry is realising that de-risking is not the solution. Trade will be conducted. But will be conducted in different ways, with less transparency and through which the risk will actually be higher. That in my view is why de-risking is not so good. We need to do it in a better way.”
What, then, is the solution? Some will point to technology and the inevitable discussion around bank disintermediation. Why bother using a network of banks that take days to transfer money around the world when players such as AliBaba, Amazon and PayPal can do the same job within seconds? But few concrete solutions have been proposed over the four days in Singapore.
At Sibos 2015, the banking sector was bullish about its ability to not only embrace, but to lead on technological innovation. Most of those GTR spoke with were also confident that trade finance will find its way to the source of demand, wherever in the world it may be. The statistics show that these protestations are usually voiced head-deep in sand. Speak to local bankers in Latin America or Southeast Asia and there’s clear frustration over an industry that’s backing out, then subsequently denying that it’s doing so. But no amount of spin will fill the trade finance gaps that continue to gape.