Why are banks withdrawing from correspondent banking?

Banks are continuing to withdraw from many of their correspondent banking relationships - a process which threatens global trade, especially in poorer countries. TXF speaks to bankers to see whether anti-money laundering (AML) and know your customer (KYC) regulations are solely to blame for this trend and what can be done to mitigate it.

Comments (1)

  • Armin Eckermann
    Armin Eckermann, Investment Times 9 May 2016

    Hi Helen, I guess we share a common interest – Trade Finance and how we can get it to work better. Today you have touched a ‘touchy issue’ in banking and it comes across in the article quite well, correspondent banking (CB) is the skeleton to trade finance – a necessary condition for Trade Finance. Without CB relationship, no trade finance! All export and import business, related documentary business as well as open account requires cross-border account relationships, credit and settlement risk arrangement between various banks. I do remembers years ago while working for a big bank, once this bank has lost its superb credit rating, the CBRs were slashed down. This only happened because the investment rating of the bank was downgraded and the bank was no longer accepted as an acceptable counterparty in the interbanking market business. Well, it was not trade what had suffered that time, it were capital market products which needed to be issued and sold by a partner with a certain investment grade. Your coverage is different. Derisking has been mentioned and the biggest derisking effort in banking moved in, in my opinion, with FATCA, FATF, and AML/CTF penalties paid by major banks in the aftermath of 2007/2009 to the different authorities left and right of the Atlantic ocean. It is nicely mentioned that any CBR today needs to be judged in each and every bank by three different units – compliance, risk and sales unit. If compliance is negative for whatever reason, risk and sales unit assessment becomes irrelevant. If risk is too high, and compliance as well as sales embrace the CRB, only a progressive, entrepreneurial bank (does it exist?) would go ahead with the CBR because it could be making money. Well, there are a few combinations possible between the three departments and their respective voting behaviour but the gist is clear – the people who are looking at compliance and credit / country risk are driving the business in most banks today. Hence, CBRs have suffered and are going to suffer further, ergo, trade finance might suffer as well! One need to understand that the CB in Canada or Singapore is a different business than CB with banks in Lesotho or Paraguay (I chose those two emerging market country randomly). However, during my active time in CB, I have noticed the different approaches and validation processes when dealing with different banks in different countries. Over the last couple of years many of the major CB in the world have cut down (and I mean substantially) on their CBRs and that has happened for only a few reason – derisking, regionalization, standardization and cost cutting. As a trade finance person, I do worry and I thing that Development Banks & Agencies should be ready to help those export–import banks in emerging markets which need to adapt and implement the new standards and techniques. This will help Correspondent Banking and World Trade, I am sure about it.

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