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Correspondent banking: Clear & present danger

A barely noticed bank rescue in the Seychelles should be a warning to all. As the cost of compliance and enforcement risk drives global firms to cut back their correspondent networks, many banks are in danger of losing the vital lifeblood of a dollar-clearing partner.

On November 11 the Central Bank of Seychelles was forced to take the type of action more common among its G8 peers six years ago as they fought to safeguard the global financial system from outright collapse.

That Tuesday the central bank of the paradise Indian Ocean archipelago moved to take full control of a tiny and largely unknown financial institution called BMI Offshore Bank, concluding, after an investigation into its operations, that it had to act to safeguard the bank’s depositors. What’s striking however, is that BMIO’s depositors were not at risk from their bank suffering the type of crumbling capital and liquidity positions that brought about the rescue of larger European and US banks during the 2008 crisis. Instead, BMIO, which the central bank found to be sound in terms capital and liquidity, was forced into the arms of its central bank for no other reason than it no longer had a correspondent bank, a crucial requirement, to rely on.

Correspondent banks provide lifelines to the global financial system for thousands of banks throughout the world, essentially enabling the completion of every foreign currency transaction or payment.

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