The Financial Stability Board (FSB) has published a new progress report on industry efforts to tackle the continuing decline in the number of correspondent banking relationships (CBRs). It raises concerns around the negative consequences of the ongoing derisking by banks for the global trade finance network.
The number of correspondent banking relationships has shrunk by 20% over the past seven years, according to an analysis of the latest Swift data by the Bank for International Settlements’ Committee on Markets and Payment Infrastructures (CMPI).
The committee’s research shows that the number of active correspondent banks last year dropped by 3.4% but noted that this was a slightly slower rate of decline compared to 2017.
One of the primary drivers of the decline in CBRs is the widespread derisking by international banks, which is largely caused by the high cost involved in performing due diligence procedures on foreign counterparts to comply with regulatory requirements. The FSB’s latest report outlines the work of international bodies in halting the decrease in inter-bank relationships and finds that more needs to be done by all players in the market.
In terms of progress made, the report cited improvements in the quality of regulatory clarifications on the ground, as a result of recent workshops organised by the Asian Development Bank and the World Trade Organisation (WTO). It also praised the Bankers Association for Finance and Trade on its recently published Respondent’s Playbook, which seeks to offer guidelines to local banks looking to forge links with their international peers, but the “concrete implementation [of these guidance tools] still requires continued focus by industry and the official sector”, it said.
As part of its action plan, the FSB is working alongside other international organisations including the World Trade Organisation (WTO) and the International Finance Corporation to increase awareness of regulatory expectations around know your customer (KYC) and anti-money laundering (AML) regulations, along with other due diligence requirements.
Speaking exclusively to GTR in 2018, Marc Auboin, economic counsellor at the WTO, warned that a serious consequence of major financial institutions cutting ties with their local partners is the exclusion of some emerging markets from the global financial network.
“We are looking into the four areas of the FSB work, with a view to identifying concrete steps that can address the trade finance dimension,” he said. “For example, on the clarification of regulatory expectations, we first realised that the trade finance community had only a limited knowledge of the updates issued by the FATF and Basel Committee on how to implement AML/KYC and combating the financing of terrorism (CFT) guidelines in the context of financial inclusion, how to avoid know your customer’s customer and how to promote utilities.
“So, with the FSB, we brought the revised guidelines to the attention of the WTO ‘expert group on trade finance’ and invited the FSB to communicate directly – a rare event – with the private sector. It contributed, exactly like in our dialogue with the Basel Committee a few years ago, to raising awareness about issues on both sides. For example, one of the problems with AML/KYC/CFT is over-compliance. The perception of the regulatory risk had become more important than the actual regulatory risk itself. It is important that proper and accurate information, notably on regulatory expectations, be delivered on both sides, to reduce the costs of over-compliance.”
The loss of banking relationships has been an industry hot-topic since concerns were first raised in 2015 in several documents published by the World Bank and the International Monetary Fund.
BNY Mellon’s 2019 Global Survey finds that correspondent banking remains a powerful means for local and global banks to share expertise and capabilities to ensure the ongoing provision of trade finance. 23% of respondents to the survey called for the “education of local banks on deal structuring taking account of the underlying transaction, rather than simply obligor/market credit risk”.