On 16 November 2018, the Financial Stability Board (FSB) published its data report on correspondent banking as well as a progress report to the G20 Summit on the FSB action plan to assess and address the decline in corresponding banking.
The FSB is concerned with banks’ withdrawal from correspondent banking in certain regions and jurisdictions. This decline may affect the ability to send and receive international payments and could have a negative impact on growth, financial inclusion and international trade by driving some payment flows underground. “Despite the actions that have been taken, data from SWIFT shows that the decline in the number of active correspondents continued in 2017, affecting almost all regions. Payments were still flowing, but were concentrated in a smaller number of banks and in the most active corridors,” said Alexander Karrer, Chair of the FSB’s Correspondent Banking Coordination Group and Deputy State Secretary at the Swiss Federal Department of Finance. For the time being, these concerns are limited to the domestic and regional level.
Correspondent banking data report
Year-end 2017 data from SWIFT payment messages show that:
- the number of active correspondents is decreasing by 4.1 % year-on-year;
- from January 2011 to end-2017, the number of active correspondents and the number of active corridors declined globally by 15.5% and 7.3% respectively; and
- while small economies experienced a stronger decline in the number of foreign counterparties (per local bank) than larger economies, the decline has not affected the total volume and value of payment messages they received, which actually increased compared to larger ones.
The progress report looks at the next steps for the implementation of the FSB’s four-point action plan:
- Stronger due diligence tools for correspondent banks: The FSB is encouraging the use of the Wolfsberg Group Correspondent Banking Due Diligence Questionnaire to increase efficiency and standardisation of the Know Your Customer process. In addition, the introduction of the new ISO 20022 message format in correspondent banking in November 2021 will enhance transparency, including through the use of the Legal Entity Identifier (LEI) and will allow banks and regulators to identify with certainty the originators and beneficiaries of cross-border payments.
- Clear regulatory expectations: The Financial Action Task Force (FATF) and Basel Committee on Banking Supervision (BCBS) are overseeing the implementation of their guidance on correspondent banking.
- Domestic capacity-building: The FSB recently held a workshop on domestic capacity development, including in the supervision of money laundering and terrorist financing. The FSB is also examining, along with the World Trade Organization, International Finance Corporation and Multilateral Development Banks, how solutions which seek to address the decline in correspondent banking could also be applicable in the context of trade finance.
The elements of the FSB correspondent banking action plan are generally in place. Therefore the FSB is now focusing on monitoring their implementation by national authorities and banks and will consider taking further steps, should the situation deteriorate further. Other international organisations are also monitoring the FSB’s March 2018 recommendations on remittance service providers’ access to banking services.
What the report does not say is that the decline in correspondent banking is itself a consequence of stronger anti-money laundering and know your customer requirements coupled with other developments, such as stronger focus in country risk. This means that a significant driver of the problem has been increased regulatory requirements – even though they have been introduced for good policy reasons.
Michael McKee has over 20 years’ experience in the financial services sector having practised at major international law firms in London.