Monday, June 6, 2016

FSB’s Americas Group Concerned about Decline in Correspondent Banking Services

On May 26 and 27, 2016, the Financial Stability Board (FSB) Regional Consultative Group (RCG) for the Americas convened in Montréal for a series of round tables covering the decline in correspondent banking services and issues relating to asset management activities. The RCG for the Americas is one of six Regional Consultative Groups established under the FSB Charter to provide a forum for FSB outreach to a wider range of countries in the region beyond the FSB membership on potential vulnerabilities affecting the region, on FSB initiatives, and on other measures that could be taken to promote financial stability. 

 

At the May meeting the RCG members discussed regional vulnerabilities and financial stability issues, followed by a discussion of the FSB’s 2016 work plan and policy priorities  They also considered implications for countries in the Americas resulting from the total loss-absorbing capacity (TLAC) standard that applies to global systemically important banks (G-SIBs), which was finalised in late 2015.  Notable amongst their concerns, however, was the effect that new regulations and prudential standards may be having on correspondent banking services, not just in the Americas region, but globally.  Correspondent banking is an essential component of the global payment system, and key to international trade, especially for cross-border transactions, allowing banks to access financial services in different jurisdictions and provide cross-border payment services to their customers.  Until recently, banks have maintained a broad network of correspondent relationships. Over the past few years, however, there are indications that this situation might be changing. In particular, some banks providing these services are cutting back the number of relationships they maintain, citing rising costs and uncertainty about how far customer due diligence should go in order to ensure regulatory compliance (i.e., to what extent banks need to know their customers’ customers) as among the main reasons for cutting back their correspondent relationships.

 

Concerns about declines in correspondent banking are bourne out by data developed in a 2015 study by the G20 and work done by the Bank for International Settlement’s Committee on Payments and Market Infrastructures over a similar period. According to the G20 report:  "Roughly half the banking authorities and slightly more local/regional banks indicated a decline in [correspondent banking relationships]. For large international banks the figures are significantly higher at 75%.”  

 

While correspondent banking used to be a regulatory backwater, Treasury officials acknowledge the critical role that correspondent banks play in the global finance system. This is particularly so for U.S. banks because of their importance in the global financial system and on the indispensability of the U.S. dollar to global markets.  As a result of heightened regulatory scrutiny, banks have two choices when it comes to correspondent banking: (1) invest heavily in risk management and compliance systems and personnel on a worldwide scale, or (2) de-risk by exiting certain product lines, customer types, or geographic locations.  This has led to calls like those from the FSB’s RCG Americas group for a more balanced approach to stem the tide of de-risking and prevent what could be wide-scale unintended economic and financial effects. 

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