Financial Stability Board chronicles the demise of correspondent banking

The Financial Stability Board says half of the 91 regulators that took part in a World Bank survey have seen a decline over the past three years

PUBLISHED : Monday, 09 November, 2015, 11:59pm
UPDATED : Monday, 09 November, 2015, 11:59pm

A report from the Financial Stability Board, an arm of the Bank for International Settlements, said half of the 91 financial regulators that took part in a World Bank survey have seen a decline in correspondent banking over the past three years.

Correspondent banking is the business that banks do with one another and is an essential link in cross-border payments, cheque clearing and remittance.

Among the 20 large banks surveyed, two-thirds reported a reduction in business with other banks ranging from a fall of 5 per cent to half at one bank between 2012 and 2015.

A barrage of regulation aimed at stemming money laundering and terrorist financing has led to billion-dollar fines for major banks since 2012, most notably HSBC's US$1.9 billion fine in 2012 and BNP Paribas's record-setting US$9 billion fine last year. Penalties like those have driven a wholesale retreat from some countries deemed high-risk, with many large banks culling the accounts of thousands of clients across entire markets.

Standard Chartered last year surprised thousands of small business customers in the United Arab Emirates when it sent letters notifying them that their accounts would be shuttered within a month.

In September, Deutsche Bank announced that it would close most of its operations in Russia as part of a bigger drive to reduce complexity, costs and risk.

The retreat from correspondent banking is not yet global, the Financial Stability Board said. But it threatens to upend regional financial security and even make money laundering and terrorist financing harder to track.

"If withdrawals continue, this has the potential to rise to a systemic issue for the regions affected as well as to drive some payment flows underground, which would make it harder for authorities to prevent financial crime and the financing of terrorist activity," the report said.

This is the dilemma that global regulators such as the Financial Action Task Force, the primary underwriter of anti-money laundering regulation, find themselves in now.

Most of the 170 smaller banks surveyed said they were losing access to the "scale and breadth" of services provided by bigger banks, according to the report. In response, they were turning to second- and third-tier banks, a trend that is likely making transactions harder to follow.

"Who are we going to deal with?" Ferry Robbani, the head of international banking and financial institutions at Indonesia's Bank Mandiri, asked of its disappearing correspondent bank network, at a conference in Singapore last month.

"We would be faced with second-tier banks, maybe third-tier banks, which in the end would, in my opinion, bring another set of risk to the industry."

Bank Mandiri is the largest bank in Indonesia by assets. Its failure to maintain connections with the global financial system leaves little hope for the scores of other banks in that market that do cross-border transactions and remittance.

The report found that the regions hit hardest were the Caribbean, Eastern Europe, Central Asia and East Asia Pacific, especially small jurisdictions with "significant offshore banking activities and high-risk jurisdictions".

Cheque clearing, settlement, cash management and international wire transfers were the businesses most deeply impacted.

The regulators want to reverse this trend, or at least the death of regional correspondent banking. The Bank for International Settlements and FATF have sought to clarify the level of risk that banks will be able to take when bringing on new customers. FATF is developing a set of guidelines that it hopes will clarify how banks should identify and manage the risks in the correspondent and remittance businesses.

"To some extent it's not transparent," FATF president Shin Je-yoon admitted at a conference last month in Singapore.