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Decline in correspondent banking services may encourage virtual currency exchanges

Monday, 3 June, 2019

Correspondent banking arrangements are in sharp decline across the world, with active relationships having decreased by 20 per cent in the last seven years, according to an international banking watchdog.

A large proportion of cross-border payments have traditionally been handled through correspondent bank relationships, especially for families and small businesses in developing countries. However, increasing regulation and tough enforcement of anti-money laundering laws have caused concerns for the banking industry.

The fines imposed for violations can be very large: in April this year, the UK's Financial Conduct Authority fined Standard Chartered Bank GBP102 million for 'serious and sustained shortcomings' in its anti-money laundering controls in two high-risk business areas, one of them being its correspondent banking business.

Some of the major international banks have accordingly deployed de-risking strategies that discourage correspondent relationships. The loss of these facilities in some countries, or their increased cost, may push people in affected jurisdictions to use shadow payment services such as cryptocurrencies, commented Benoit Coeure, Chairman of the International Committee on Payments and Market Infrastructures (CPMI), an arm of the Bank for International Settlements.

CPMI's analysis is based on payment message data from over 200 jurisdictions, provided by the SWIFT international payments system. These show that, while the decline is worldwide, it is more pronounced in some regions than others. In 2018 there was a global decline in active relationships and corridors of about 3.5 per cent and 2 per cent respectively. Within this, however, North America has seen a decline of only 10 per cent, while Latin America and the Caribbean have experienced a decline of their active correspondent banking relationships by 30 per cent since 2012. In 2016, the former Bahamas Minister of Financial Services, Ryan Pinder, said Caribbean and central American states were being severely harmed by the withdrawal of correspondent banking services in the region as part of international de-risking strategies.

Although most jurisdictions had more than 100 active correspondent banking relationships in 2018, there were 15 jurisdictions with fewer than 20 relationships. The majority are small-island dependent territories, with an average population below 200,000, said the CPMI.