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Correspondent banking wilts under weight of compliance red-tape

08 May 2017  |  10391 views  |  1 digital banking

The correspondent banking model governing bank-to-bank relationships is being eviscerated under the increasing weight of compliance challenges, experiencing a 25% drop in global connections over the past eight years, according to research from financial crime vendor Accuity.

Since the 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. In this climate, the threat to banks of doing business in certain countries potentially outweighs the benefits of services to their clients, says Accuity, even if there may be good business opportunities to pursue.

Businesses in the regions most affected by the de-risking tendency are struggling to access the global financial systems to finance their operations, forcing local banks to use non-regulated, higher cost sources of finance.

The trend is most evident in a steep decline in USD relationships in some major developing economies, particularly in Latin America. On the flip side, Accuity's research shows a sharp increase in RMB relationships forged with institutions in Eastern geographies.

“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," says Henry Balani, global head of strategic affairs at Accuity. "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.”

In November last year, eight Latin American central banks signed up to adopt Swift's sanctions screening service and KYC Registry in an effort to combat the threat posed to the region by de-risking measures imposed in correspondent banking relationships.

Says Balani: “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.”

Comments: (1)

A Finextra member
A Finextra member | 09 May, 2017, 06:06

So How do Ripple and Blockchain overcome this one?  this is just a traditional old fashioned banking problem.... these relationships are very analogue.

Sometimes new solutions cannot solve old problems.  SWIFT may have the answer - they have the history.  Be interesting to see how this pans out

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