Banks that are concerned about falling afoul of anti-money laundering regulations cut their correspondent relationships by 6 percent worldwide between 2011 and 2016. The number of active correspondent banks for U.S. dollar and euro transfers fell even further, by 15 percent, according to a survey by the Financial Stability Board.
Correspondent banking relationships are essential to the proper functioning of the global economy as banks rely on banks in other countries to hold deposits on their behalf in order to make international payment transfers and to provide other cross-border banking services.
“The decline in the number of correspondent banking relationships is continuing,” the FSB said in the report that was released last week.
The international body, which was tasked by the G20 countries with monitoring and making recommendations about the global financial system, warned that the decline can have “potential adverse consequences on international trade, growth, financial inclusion, as well as the stability and integrity of the financial system.”
The reduction of correspondent banking relationships has increased in response to tougher anti-money laundering regulations, as well as harsher penalties for banks that fail to identify their customers or infringe banking regulations. As a result, correspondent banks have blamed both a decline in margins and an increase in reputational and financial risks associated with this type of banking service for cutting ties with bank clients.
The process known as “de-risking” was most pronounced in Eastern Europe, where the number of active correspondents fell by 16 percent, in other European countries (-15 percent) and Oceania (-12 percent).
The Caribbean and small states in the Pacific region were the sub-regions with the highest rates of declines of around 10 percent in 2016. Last year the International Monetary Fund identified de-risking as a particular threat to the economies of the Caribbean.
On average, small economies are the most affected by the reduction in the number of foreign correspondent banks serving banks in these countries, the FSB found. The 15 largest economies saw only a minor reduction of 3 percent in the number of surveyed banks that offer correspondent banking services to banks in those jurisdictions, compared with a decline of 29 percent for 55 economies with a GDP of less than US$10 billion.
Respondent banks perceived money transfer operators as the highest risk clients and reported terminating services to remittance service providers “at least 70 percent more often that other types of higher risk clients,” the reported noted.
Remittance services temporarily halted in Cayman
In 2015, Western Union had to temporarily stop remittance services in Cayman after Fidelity Bank decided to stop offering correspondent banking services to remittance companies. Jamaica National, which operated MoneyGram and several other cash transfer brands in Cayman, lost its own bank in the same year when negotiations failed with Cayman National Bank, leaving the remittance companies in a position where it could only accept U.S. dollars in Cayman.
The episode led to a significant fall in remittances sent from Cayman and a U.S. dollar cash shortage on island.
The FSB survey confirmed how reliant local banks without an international branch network are on correspondent banking facilities.
More than half of the banks surveyed in Latin America and the Caribbean rely on two or fewer correspondent banks, compared with 45 percent worldwide.
The Financial Stability Board noted that despite the decline of active correspondent banks, the number of payment messages increased by 36 percent between 2011 and 2016. However, the FSB believes this does not reflect an increase in the number of wire transfers, but rather indicates “a lengthening of payment chains.” This means that because there are fewer correspondent banks, more intermediaries are needed to connect two banks, which requires are larger number of messages.