Correspondent banking relationships are in decline. Between 2009 and 2016 they fell by 25%, according to research published earlier this year by compliance software company Accuity. That fall was all the more striking considering that the number of global bank locations increased by 20%.
Global firms want to work with local banks, but they fear the hefty cost of regulatory compliance. In 2014 alone, banks paid out $10 billion in fines relating to anti money-laundering (AML) regulation, according to the US Department of Treasury.
Banks feel their hands are tied, argues Etienne Bernard, global head of transaction banking at Crédit Agricole, with the burdens on them not fully understood by the authorities that impose them.
“There needs to be greater transparency regarding some regulatory requirements banks are facing in transaction banking," he says. "There is a need to help to continue to be within these requirements so that a lack of understanding does not lead to [the banks] stopping doing business.”
Anand Pande, global product chair of trade and supply chain finance at banking platform provider Intellect and founder of The Growth Paradigm Partnership, says there has been a wariness of doing business with correspondent banks.
“There has to be a push and a willingness to unpeel the complex world of correspondent banking as well as doing business with small companies,” says Pande. “This means developing the ability and wherewithal to have a risk appetite to support the real economy, down to the small and mid-tier banks and companies.
“The policy of risk aversion needs to change. This is critical to support and grow the real-economy flows of both cross-border and domestic trade.”
According to Brian Barry, head of cross-border payments at ANZ, the initial rush to de-risk has settled down, but has created new questions.
“There is more discussion on sharing information to help support correspondent banking practices and deliver better end-to-end client outcomes,” he says.
Big banks have every incentive to work with an international network, as the decline in correspondent relationships is hurting their ability to generate revenues.
“Cash management businesses within financial institutions are under serious pressure, with a significant drop in revenues,” says Bernard. “There are reports of declines of anything between 30% and 80%.”
The results of the Euromoney's Cash Management Survey 2017 show both AML and know-your-customer (KYC) rules are front and centre for financial institutions. The two sets of regulations accounted for fully 50% of the answers to the question: 'Which regulations have impacted your choice of cash management provider?'
Bankers are calling for regulators to give them some help.
One Europe-based banker tells Euromoney there is scope for international organisations like Swift, the International Chamber of Commerce (ICC) and the Bankers Association for Finance and Trade (Baft) to help.
“[Those organizations] are supposed to be enabling trade,” says the banker. “The cost of regulation is pushing out local banks. A $50,000 price for KYC is painful for a global bank, but almost completely prohibitive for a small bank in Africa.”
Anand Pande, Intellect
The Accuity research touched on the risk that regulation, rather than making the industry more secure, is instead pushing institutions to use the services of unregulated entities.
And the task of finding solutions does not lie solely with the international banks, as smaller banks need to comply with the same standards.
“These geopolitical and sanctions risks seriously need to be addressed as AML and KYC regulations become stricter,” says Bernard. “Banks need even greater confidence in the correspondent banks they use for cross-border transactions. If this challenge is not addressed by smaller local banks, it will lead to a decrease of correspondent banking relationships and decline of cross-border transactions in some regions.
“It will open up space for less regulated entities to manage those flows.”
There is a school of thought that Swift’s systems could help combat some of the problems: its global payments initiative (GPI), for example, may help with transparency over the whole network.
“There needs to be an initiation of standards that are widely recognised and accepted,” says Bernard. “This is a global initiative for an organisation like Swift to take on. There need to be further improvements on data management for KYC. At present it can cost up to $30,000 to do KYC on one correspondent bank. To combat this we need new infrastructure to lower processing costs.”
Tweaking existing systems is not the answer, Bernard adds.
“There is a need for banks to increase their technology capacity to manage this correspondent banking risk, including filtering and operations monitoring," he says. "Renovating old technology is not the solution to this.”