A series of compliance-driven regulations might be enough to push more correspondent banks to cut local bank ties to avoid “regulatory burden strangling their margins,” according to a Corporate Treasurer article.
The article explains that bank relationship diversity with correspondent banking has been a common practice since 2008 but starting Jan. 1, when the reporting of Basel Committee on Banking Supervision’s intra-day liquidity coverage ratio begins, the industry may see more splits between correspondent banks and local banks. Citing two major banks — JP Morgan and Citi — already cut ties to 500 foreign lenders last year alone. Citi is in the process of evaluating it relationship with correspondent banks all together.
"Citi believes there is a high likelihood that correspondent banking models will change as a result [of liquidity coverage ratios and reporting],” John Ahearn, global head of trade, treasury and trade solutions at Citi said in a report cited by Corporate Treasurer. “Traditionally, banks have put assets on their balance sheet to protect their cash management and deposit business. But if those liabilities that they are protecting have no value under LCR, there will be dramatic ramifications in the near term. Liquidity may be the driver of a spike in pricing on the trade side of the book.”
The LCR was a series of proposals published Jan. 1, 2013, by the Basel Committee on Banking Supervision in its Basel III report: “The Liquidity Coverage Ratio and Liquidity Coverage Ratio and liquidity risk monitoring tools. The report outlines “key algorithms and calculations necessary to determine a bank’s actual level of intra-day liquidity, as opposed to end of day liquidity which was the standard during the 2008 financial crisis.” These new monitoring tools impact internationally active lenders and include “reporting of their intraday liquidity use on nostro accounts with their correspondent relationships.”
The Corporate Treasurer piece provided insight about enforcing compliance to new regulations and which countries will likely comply. Criticism from banking leaders includes complaints about the timing of the changes — particularly because it coincides with other implemented deadlines from the Foreign Account Tax Compliance Act, Foreign Corrupt Practices Act, Single Euro Payments Area regulations and Dodd–Frank Wall Street Reform and Consumer Protection Act, according to the article.
“While the BCBS cannot enforce these requirements directly, it seems all the major nations are on page to comply. The US Federal Reserve approved the broad tenets of the LCR framework on September 3, as well as introduced some changes to help its lenders grapple with the changes,” Corporate Treasurer reported.
When it comes to trade finance implications, allowing correspondent banks to keep their current relationship with local banks may be unfeasible because of the liquidity reporting changes. The article states that bank executives have argued these changes will make in unfeasible for larger banks to offer small banks, which may cause a shift in the trade finance business model. According to the article: “If adopted to the letter of Basel law, the liquidity reporting ratios and intraday reporting will be phased in from January 1, 2015, with an initial minimum threshold requirement of 60 percent, rising in equal annual steps of 10 percent to reach 100 percent on 1 January 2019.”
"The changes in store, thanks to LCR and Basel, are clearly revolutionary,” Sameer Sehgal, trade head for Europe, Middle East and Africa at Citi, said in the article. “While a few top global banks have an active distribution desk, asset optimization is an important discipline; not only to manage credit and sovereign risk, but also LCR and high quality liquid assets [HQLA] which is clearly radical and alien to a great deal of banks."
Despite criticism, there is also reason to suggest better reporting systems and more regulation could benefit corporate clients that have a diverse portfolio of banking relationships.
“Companies that desire better visibility often find not all their banks deliver the service, and must be persuaded to deliver integrated data to treasury management and enterprise resource systems. Once a bank has systems in place to report internal liquidity within the day to regulators and compliance officers, it will also be able to provide more timely information to corporate clients on their own accounts,” Corporate Treasurer explains. “This will help corporates who emphasize diverse banking relationships that incorporate local, regional, and international banks into a diversified financial support network. However, the consequence of more frequent liquidity reporting can lead larger banks to shy away from doing business with local and regional banks altogether.”