omniture

Accuity Research Shows 25% Drop in Global Correspondent Banking Relationships Linked to De-risking

Accuity
2017-05-08 15:00 3480

SINGAPORE, LONDON and NEW YORK, May 8, 2017 /PRNewswire/ --

  • De-risking by US and European banks driving the decline
  • Certain geographic regions are being de-risked, leaving local businesses without access to the international financial community
  • China prevails as region with highest growth in correspondent banking relationships
  • Decline in USD relationships is either indicative of a concentration in relationships or a reduction in USD dominance

Recent banking research ("the Research") from Accuity, the global financial crime compliance, payments and KYC solutions provider, has revealed that between 2009 and 2016, correspondent banking relationships, where one financial institution provides services on behalf of another in a different location to facilitate cross-border payments, have reduced globally by 25%. This comes despite the fact that global GDP per capita grew during the same period, following the 2008 financial crisis.

Commenting on the findings, Henry Balani, Global Head of Strategic Affairs at Accuity, said, "Correspondent banking represents the cornerstone of the global payment system designed to serve the settlement of financial transactions across country borders. Our Research highlights some important trends in de-risking and its impact on international trade and global banking.

"The irony is that regulation designed to protect the global financial system is, in a sense, having an opposite effect and forcing whole regions outside the regulated financial system. This matters because allowing de-risking to continue unfettered is like living in a world where some airports don't have the same levels of security screening - before long, the consequences will be disastrous for everyone."

Measuring the cost of global de-risking

Since the global financial crisis of 2008, regulators have imposed requirements for greater transparency, established higher liquidity thresholds for banks as well as stepping up enforcement actions on institutions that violate anti-money laundering (AML) regulations.

In 2014, AML penalties peaked at $10 billion compounding the challenges banks face in high-risk geographies (Figure1). In this climate, the threat to banks of doing business in these geographies potentially outweighs the benefits of services to their clients, even if there may be good business opportunities to pursue.

The challenges of increased operational costs, competitive and regulatory pressures have driven banks to withdraw from correspondent banking relationships. Historically, these relationships were provided as services to international customers, but this is no longer viable, as banks cannot justify the increased compliance cost associated with offering correspondent banking services to their local customers. As a result, businesses in the regions most affected are struggling to access the global financial systems to finance their operations. Without this access, local banks are forced to use non-regulated, higher cost sources of finance and expose themselves to nefarious actors and shadow banking.

Henry Balani added: "A number of factors have contributed to derisking, the most important being that the risk / reward balance has become unfavourable for large clearing banks and in response they have taken a country / region risk view in deciding who they can do business with. If we want to reverse this trend and begin to 're-risk', then the 'antidote' will require more granular level due diligence and proper risk assessments to provide large clearers with the confidence that they can deal with low risk businesses in high risk jurisdictions."

Decline in USD relationships is either indicative of a concentration in relationships or a reduction in USD dominance

  • The number of USD correspondent relationships declined by 15% with Euro relationships showing a steeper decline of 23%
  • The number of Chinese Renminbi (RMB) correspondent relationships increased by 8%
  • Global bank locations in developing economies increased by 31% since 2014

Findings from this research reflect the number of correspondent banking relationships transacting in particular currencies rather than the volume of currency transactions. Research shows a steady decline in the number of USD correspondent banking relationships globally since 2014. The USD was the currency of choice as the global economy recovered from the global financial crisis in 2008. While USD continues to be the currency of choice, the rate of decline in the number of USD relationships further accelerated with a drop of 13% between 2015 and 2016 from a decline of 2% between 2014 and 2015.

While the 25% drop in global correspondent relationships is greater than the USD correspondents decline, the trend for USD is particularly significant when compared to the contrarian increase in the number of Chinese RMB correspondent banking relationships.  Since 2014, research shows an 8% increase and since 2012, the number of the RMB relationships showed a dramatic increase from 3,600 to 8,800 relationships in 2016 (albeit from a low base). The research further reveals a peak in the number of RMB correspondent banking relationships in 2015 as the USD continued to decline.

There are two explanations for this decline in USD relationships when compared to the RMB. Either there is a concentration in USD relationships, with more transactions settled through fewer relationships, or there is a decline in the dominance of USD.

Global bank locations in developing economies have also increased by 31% since 2014, largely due to growth in China and APAC. This is significant as the number of banks in established global financial centers are in decline.

China prevails as region with highest growth in correspondent banking relationships

Actions from US and European regulators have resulted in banks shunning higher risk economies while missing out on the potentially profitable use of their currencies for correspondent banking, in the process.

Our Research reveals that the areas benefiting from the changes are largely in the East. For instance, China has experienced a 133% increase in the number of banks since 2009 and an astounding 3,355% growth in correspondent banking relationships during the same period.

Balani added, "The decline in USD relationships has several explanations: either we are seeing a concentration in USD relationships among fewer correspondent banks, or we are seeing a decline in USD dominance. The shift can also be attributed to the potential AML penalties associated with using these currencies. Since the financial crash of 2008, we have also seen significant commitment from financial institutions in emerging economies to demonstrate they are not high risk. We see this playing out in the East and the increased number of relationships reflects their commitment."

Balani concluded, "As we see more regulation come into place, global banks can support growth in local businesses by investing in technology that can securely and quickly determine the risk of a transaction in a high risk geography."

For more information, please contact:

Heather Smith, Accuity, heather.smith@accuity.com  +44 (0)7342-069-456
Prisita Menon, Cognito, Prisita.Menon@cognitomedia.com  +65 9856 4954

Notes to Editors

About Accuity

Accuity offers a suite of innovative solutions for payments and compliance professionals, from comprehensive data and software that manage risk and compliance, to flexible tools that optimize payments pathways. With deep expertise and industry-leading data-enabled solutions from the Fircosoft, Bankers Almanac and NRS brands, our portfolio delivers protection for individual and organizational reputations.

Part of RELX Group, a world-leading provider of information and analytics for professional and business customers across industries, Accuity has been delivering solutions to banks and businesses worldwide for 180 years.

About the research:

Accuity compiled its research using data collected from its payments solution, Bankers Almanac for Payments. The research focused on eight years of data from 2009 to 2016, and reviewed the creation of new banks vs. the demise in correspondent banking relationships. The data is compiled from an average of 29,000 banks in 238 countries or regions across the world.

The research is based on standard settlement instruction (SSI) data that Accuity collects for its Bankers Almanac for Payments solutions. Accuity proactively collects this information based on its relationships with banks around the world. While Accuity makes every effort to keep up to date with the constantly changing correspondent banking landscape, its data is limited to the SSIs that each bank chooses to publish with us.

For more information about the Research, please contact Heather Smith at +44 207 653 3832, Heather.Smith@accuity.com.

Charts and appendices and with research highlights

Charts:

Charts are available from the contacts above that show the research by the following regions: Global, US, EU, China, Africa.

Figure 1:  Total AML penalties by year

Total AML penalties by year (Source: US Department of Treasury, Office of Foreign Assets Control)
Total AML penalties by year (Source: US Department of Treasury, Office of Foreign Assets Control)

Source:  US Department of Treasury, Office of Foreign Assets Control

Appendices with more detail on selected regions:

1. The West:

Established Western financial institutions are reducing their correspondent banking relationships as they shun high-risk countries or regions, with loss of bank services revenue as a result. In addition, initiatives by U.S. and European regulators that have had unintended de-risking consequences may be driving the drop in the number of USD and Euro relationships. This could indicate either a concentration in relationships or declining dominance of these currencies for international trade and correspondent banking leveraging the USD and Euro.

Despite banks in developed countries having a reputation for fairness and trust, they are not picking up additional business because of their reluctance to pursue business in high-risk geographies. This is related to higher operational costs, competitive and regulatory pressures. In addition, they are losing business and banking opportunities as big banks are being replaced by local, smaller banks across the world, while larger bank growth is stagnating.

Accuity analyzed the U.S., the UK and the European Union's performance and have generally found that between 2009 and 2016, the number of bank head offices declined from 23,240 to 17,631, a decline of 24%. More significantly, the number of times banks were used as correspondents declined 30% in the same period.

Specifically, for each country and the EU region, we find the following:

US

The US market has experienced growth rates higher than other advanced economies, yet despite this, there has been a drop in correspondent banking relationships.  

  • According to the 2016 projections, the US GDP growth rate in 2016 was 2.4% (higher than other advanced economies of 1.8%)
  • Number of bank head offices has however declined steadily from a high of 16,257 in 2009 to 12,220 in 2016 (25%)
  • The number of branch locations also dropped from 118,712 to 110,688 (7%)
  • The count of U.S. correspondent relationships dropped from 106,050 to 88,618 during the same period (20%)
  • The number of USD correspondent banking relationships dropped steadily from 87,515 to 72,619 (20%) indicating a concentration of USD flows through fewer correspondent banking relationships or declining USD dominance.

UK

The UK has seen considerable bank consolidation over the past 10 years, which may have made the idea of correspondent banking seem daunting and burdensome.

  • The UK has experienced a 10% drop in total number of banks from 2009 to 2016
  • The total number of correspondent banking relationships peaked in 2011 declining 16% through 2016

EU

The EU saw a significant drop in correspondent banking relationships between 2011 (126,502) and 2012 (91,262) due primarily to the completion of the Single European Payments Area (SEPA) where payments between EU countries were no longer considered cross border.

  • However, the declining trend of correspondent banking continued from 2012 with the lowest number of relationships in 2016 (70,292) despite the economic recovery from the 2008 financial crisis with 2015 showing GDP per capita growth of 1.96%.

2.  The East:

Some unexpected countries have benefited from an uplift in banking relationships, allowing them to support local businesses and in turn grow. However, these countries have been rapidly expanding from a lower economic base since 2008, overriding the potential de-risking that may be occurring.

China

Since 2009, GDP per capita has been positive with growth rates at 10.1% in 2010. Despite a decline in the growth rate to 6.8% in 2016, the number of banks have also increased (421 to 983) with branch locations increasing significantly from 57,937 to 95,801.

  • Correspondent banking relationships have also increased significantly from 65 in 2009 to 2,246 in 2016
  • Both the number of Chinese RMB correspondent banking relationships (17 to 49) and USD relationships (1,193 to 1,528) have also shown increases

Bangladesh

Bangladesh has shown steady per capita GDP growth at 5.28% in 2015. The number of times Bangladeshi banks were used as correspondents increased from 64 to 137 in the same period reflecting a 114% increase.

  • Number of bank head offices has been relatively flat at 40 in 2009 to 41 in 2016
  • Interestingly, the number of USD correspondent banking relationships has increased with a peak of 748 in 2015 and drop to 622 in 2016
  • The number of Chinese RMB relationships has declined from 15 in 2009 to 9 in 2016

Cambodia

While the total number of banks remained flat at 27 between 2009 and 2016, the number of branch locations increased significantly (31 to 122) during the same period. However, the number of times banks were used as correspondents also increased significantly.  While there was only one correspondent banking relationship up to 2012, by 2016 there were 12 correspondent banks.

  • Both the number of USD and Chinese RMB correspondent banking relationships increased significantly between 2009 and 2016, with RMB relationships increasing from 1 to 18 and USD from 99 to 134.

Photo - https://photos.prnasia.com/prnh/20170504/1842879-1

 

Source: Accuity
Related Links:
collection