On July 4, the Financial Stability Board (FSB), an international body of financial-sector policymakers, published its long-awaited report on the decline in international correspondent banking.
Building on work by the World Bank and the Committee on Payments and Market Infrastructures (CPMI), it finds that international correspondent banking has become more concentrated and that, as a consequence, payment chains have likely grown longer. This finding is consistent with the results of a recent CGD analysis, which found a 10 percent decline in the volume of correspondent banking, mostly to very poor countries. Correspondent banking relationships are critical to businesses in poor countries that lack the credit they need to create jobs. To get access to this credit, they need local banks to have easy connections to large international banks. The results of the FSB report highlight the constraints faced by businesses, especially in poor countries, when it comes to establishing a banking relationship.
The FSB report’s findings are based on two sets of data. The first is a new survey of banks and national authorities in 48 jurisdictions. Three hundred and forty-five banks participated in the survey, including many of the large international banks that provide correspondent banking services. The second is an updated dataset on international correspondent banking activity provided by the Society for Worldwide Interbank Financial Telecommunications (SWIFT)—the most widely used messaging service for international payments. The dataset covers more than 200 jurisdictions over the six years from 2011 through 2016. It includes information on payments volume (the number of payment messages sent), payments value, and the number of correspondent banking relationships (CBRs)—all disaggregated by currency, corridor, and payment direction.
The FSB finds that the number of active CBRs has declined by 6 percent since 2011. This decline is a global phenomenon, affecting all regions and major international currencies, and has continued through 2016. Over the same time period, however, the number of payment messages sent has increased substantially—by 36 percent since 2011. The value of those payments has also risen, but not by nearly as much—less than 10 percent. With fewer correspondent banks, payment messages may have to travel more indirect routes, via additional intermediaries, to reach their destination. As the FSB points out, it is not yet clear what the effects of this concentration will be. On the one hand, consolidation may put the industry on more sustainable footing. On the other, it may further increase the fragility of correspondent banking networks, lower competition, and make international payments costlier.
While payments volume has risen globally, 42 jurisdictions have seen it shrink. In 30 jurisdictions, the value of correspondent banking payments has also fallen. Importantly, the number of correspondent banking accounts that transact in dollars or euros has declined by 15 percent. Dollar and euros denominated more than 80 percent of payments via SWIFT in 2016.
Similar to the earlier CGD paper, the FSB’s analysis suggests that small economies are among the most affected by CBR withdrawal. Correspondent banking is typically a fee-based service, and small economies may not be able to generate sufficient payments volume to cover the costs of servicing them. While the largest economies have barely been affected, small economies have lost, on average, nearly a third of their CBRs.
Another important factor is compliance with international anti-money laundering/combatting the financing of terrorism (AML/CFT) standards, as laid out by the Financial Action Task Force (FATF)—a standard-setting body. Countries whose compliance with FATF AML/CFT standards is either incomplete or uncertain have lost a disproportionate share of CBRs. The 22 countries that have either failed to remedy deficiencies in their AML/CFT frameworks or else have never been assessed by FATF have lost, on average, roughly 40 percent of their CBRs, according to the FSB’s survey.
Other results from the survey paint a more complicated picture. When asked to identify their reasons for terminating CBRs, the primary reason banks gave was not AML/CFT risk or even related compliance costs, but rather changes in business strategy, which accounted for 40 percent of terminations. Three other factors—a lack of profitability, a change in risk appetite, and AML/CFT/sanctions-related issues—each accounted for 20 percent of CBR terminations. Among the various AML/CFT/sanctions-related reasons given, compliance costs and respondents’ inadequate AML/CFT risk controls featured most prominently.
The bottom line: the decline of correspondent banking relationships, especially with smaller and poorer countries, remains an important policy issue. We are currently working on a new report that will highlight both policy and technology solutions. Stay tuned!