News and Insights

A recession is not an excuse to restrict correspondent banking

LONDON, UK (Centus) - Since the 2007-8 Recession started, the scope of banking regulations has increased. Yet in the case of correspondent banking, these measures have only been counter-productive. The International Finance Corporation found that the number of correspondent banking relationships decreased by 27 per cent.

The regulatory landscape in Europe has dramatically changed in recent years. The Basel Committee on Banking Supervision, of which the UK and EU member states like Spain and Italy are members, produced a report on intra-day liquidity cover ratio. It highlighted that there have been more divisions between correspondent banks and local ones. Two substantial banks, JP Morgan and Citi, slashed their links to 500 foreign lenders alone in 2013. Chief executives reported that these rules make it difficult for large banks to aid smaller ones.

On August 22nd, McKinsey, a consultancy firm, released statistics showing how the nature of global banking has changed since 2007. Loans have contracted by a third in the UK and Switzerland and by half in the rest of Europe. This decline started in 2011, according to McKinsey, which demonstrates banks’ activities have been prohibited by these unhelpful rules.

Sanctions have made it particularly difficult for European banks to forge corresponding relationships with Iranian banks. Some of them have continued to retain their ties to Iran though. Deutsche Bank accepts Iranian payment orders and processes their requests. Belgium’s KCB bank has established links to Iranian banks too. This shows that many banks are still discovering new methods to preserve their correspondence with sanctioned institutions.

During the recent G20 meeting in Germany, the Financial Stability Board (FSB) issued the results of a survey of more than 300 banks in 50 nations, which demonstrated that the number of correspondent banking relationships declined by 6 per cent across all currencies in 2011-2016. Europe witnessed a -15 per cent decrease in its correspondent banking. According to the FSB, more stringent regulations to tackle anti-money laundering, counter-terrorist financing and sanctions are reasons why correspondent banking has reduced. They recommended that the dimensions and the implications of the issue be reviewed, new guidance from the Financial Action Task Force and the Basel Committee on Banking Supervision and strengthening tools for due diligence in correspondent banks. Otherwise, this could disrupt consumers’ ability to send and receive international payments and may drive payments underground.

A banking crisis may have caused the last recession, but if these regulations are not reformed, the FSB is right to say that international payments could become difficult. Imposing restrictions on financial institutions is not necessarily the most sensible solution moving forward. Banks still play a crucial part in driving economic growth and whilst their activities should be monitored, they should not be prevented from generating wealth and creating jobs. Prohibiting correspondent banking is one way of ensuring this happens. The FSB’s recommendations moving forward should be adopted by many European authorities if they want the banking sector to thrive. International payments are common transactions which many customers engage in. These activities should not be stopped altogether.

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