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Just months into the first pandemic in over a century, the top brass at Swedish lender Handelsbanken handed trade finance head Stefan Carleke a formidable task.

After watching other Nordic banks become embroiled in financial crime scandals over the last few years, Handelsbanken wanted to do everything it could to minimise the risk of befalling the same fate. The trade finance division, with its sprawling network of correspondent banking relationships in developing countries, was quickly identified as high risk by the compliance department.

Management asked: could Carleke find a way to gut most of that risk from its trade finance offering? And could he do it within 12 months?

To that task the banker added another challenge of his own: to improve Handelsbanken’s trade finance product, which he describes as lacklustre and falling behind its peers at the time.

A small internal team, dubbed Task Force Trade, decided the best solution would be to give up the bank’s own correspondent banking network and instead piggy-back on another lender.

Carleke and his colleague Andreas Haag came up with a shortlist of banks which they approached during the summer of 2020, eventually striking a deal with Swiss banking giant UBS.

Under the partnership, Handelsbanken is dismantling its correspondent banking network and using UBS’ much larger grid of international financial institutions. After a few months of testing, the rollout across Handelsbanken’s markets began on May 17 this year.

“All our trade finance-related business – I’m talking about letters of credit and collections – are routed through UBS inward or outward,” Carleke tells GTR.

Scrutiny on correspondent banking

Banks which provide cross-border services generally require correspondent banks to carry out services on their behalf in countries where they do not operate. The relationships are usually considered high risk by financial crime regulators and banks must devote resources to conduct ongoing monitoring of not only end customers, but also the financial institutions in their network.

While other small to mid-sized banks around the world have taken a similar path as compliance costs associated with correspondent banking have soared, Handelsbanken says its deal with UBS is unique because it has retained control over its operations division while using UBS’ network and limits.

As Carleke puts it, the bank has outsourced the relationships with financial institutions, not its entire back office, as other banks have done.

It was “vital that we keep our operations because we don’t want our clients to feel that we are doing something new or something’s changed… they should still be feeling that it was Handelsbanken and they’re talking to the same trade finance relationship manager as they’ve been doing for 20 years”, Carleke says.

Many of the lenders the initially bank approached – Handelsbanken declined to name them – offered standardised solutions to plug into their correspondent banking network but baulked at Handelsbanken’s demand to keep control of its operational functions: document checking, compliance with International Chamber of Commerce rules and writing the text of guarantees. Handelsbanken also wanted to keep the ability to offer silent confirmations.

Insisting on operational control was a “very odd thing to do” and they “met some resistance” from the banks they first pitched a partnership to, according to Carleke.

He says the first lender they approached said: “‘No one has really asked the questions that you are asking’. I remember that night very well, because I thought, ‘what am I doing?’” But with UBS, they were able to thrash out a deal.

“We had extremely little time to waste because we were losing business, so this was a really high-pressure project,” says Haag, Handelsbanken’s senior manager for global partnership solutions, international payments and trade services.

“I think since we had been pushed into a corner, basically, as a bank, we had to come up with a new thing.”

‘Talk of the town’

The deal between Handelsbanken and UBS has caught the interest of the Nordic trade finance industry.

Allan Nielsen, global head of sales for Stockholm-headquartered SEB, tells GTR the Handelsbanken-UBS tie-up is the “talk of the town”. He adds: “I think all of the Nordic banks have tried in the past outsourcing arrangements in terms of document handling, but I think this is the first time I’ve heard of outsourcing the infrastructure.”

As a result of tougher regulatory scrutiny, Nielsen says, most Nordic banks have been keen to trim the number of bank relationships they have, particularly in emerging markets: “Those days where a bank could have thousands and thousands of Swift keys out there with all kinds of different banks are gone.”

But Nielsen also points to some uncertainties: what happens if the bank providing the correspondent relationships is suddenly unable to deliver? And what kind of expectations will regulators have of banks about their oversight of such deals?

Sweden’s financial regulator, the Financial Supervisory Authority, did not respond directly to questions from GTR about its expectations of firms that outsource correspondent banking ties but says that in general “what needs to be done in a specific case is to a large extent up to the bank in question based on the specifics of the relationship and other circumstances involved”.

“We expect banks to identify, monitor and control all its risks,” spokesperson Susan Vo Bergqvist adds.

At a GTR roundtable event in August, many participants from the Nordic trade and export market complained that the uptick in regulatory scrutiny across the region was threatening to make trade finance marginal or even loss-making, particularly in the small and medium enterprise market.

Jamilia Parry, a financial crime expert with PA Consulting, says the more stringent due diligence lenders are conducting on correspondent banking partners is “driving conversations across the Nordic banks as to whether or not they have appetite for dealing with certain correspondent banks within certain jurisdictions where perhaps there are known inherent weaknesses in AML and sanctions-based controls”.

She expects there will be “a streamlining of correspondent banking networks”, not specific to the Nordics, as banks adjust their risk appetites and increase their controls to “manage the risks associated with those correspondent relationships”.

Haag says since the deal Handelsbanken has fielded calls from other banks quizzing them on how the relationship with UBS is modelled, and that he expects banks of a similar size (Handelsbanken had about US$355bn assets under management in 2020) to face similarly tough calls as the costs of maintaining global financial institution relationships mount.

Other alternatives dismissed

When deciding on a course of action, Task Force Trade didn’t feel like it had many options. The only other serious idea in contention was winding up the bank’s trade finance offering entirely.

But Carleke, along with a colleague, calculated that many “clients would basically leave us in other business areas” if the bank cut its trade finance business. “The senior management were all white in their faces when I showed them,” he says.

Carleke also mulled, but discarded, the option of turning to one of the blockchain-based solutions that could help ease the risks posed by correspondent banking, which he felt would not be ready for another six or seven years. “If I go out to a client now and ask ‘hey, we have blockchain technology for trade finance, will you do business with us?’ Everybody would say no. Because no one is asking for it,” he says.

Handelsbanken’s trade finance division now has access to vastly more connections with financial institutions than it had previously and Carleke says its offering “became 200% better than it was the day before” the UBS tie-up. The duo say they don’t yet have figures, but believe they are clawing back market share.