A new report from the International Finance Corporation, a part of the World Bank Group, finds correspondent banking relationships are down, an unintended consequence of regulatory reform.
Reports in The Financial on Friday (Sept. 8) said 27 percent of global banks surveyed have reported a drop in the number of correspondent banking relationships. The decline has led to a cutback in services, especially in developing countries, the IFC said.
In a survey of 300 banks across 92 countries, the report found Sub-Saharan Africa saw the steepest decline in correspondent banking activity, with 35 percent of banks there reporting a drop in such relationships.
“We are concerned,” said IFC CEO Philippe Le Houérou. “In emerging markets, the business environment has often been challenging for banks and their customers, but a decline in correspondent banking disrupts the financial connections that countries and businesses need.”
Fewer correspondent banking relationships mean a depressed ability to provide key services like trade finance, cross-border wire transfers and more, analysts warned. The data was released following the World Trade Organization’s recent findings that there is a $1.4 trillion gap in trade finance across the globe, with the WTO reporting Africa is experiencing a more than $100 billion trade finance gap.
One factor behind the trend, analysts noted, is the increasingly complex regulatory landscape. Banks are pulling away from their relationships with emerging economies as they adhere to new rules that address money laundering, risk and more. The IFC also pointed to heightened capital requirements, rising compliance costs and the threat of fines as other drivers behind banks’ decision to pull back from these markets.
“Trade, economic growth and the remittances that families depend on are at risk when banking relationships deteriorate,” added IFC financial institutions group director Marcos Brujis in another statement. “By working together, multilateral institutions, regulators and banks can help ensure that necessary reforms don’t create unintended costs for the most vulnerable people.”
Banks surveyed by the IFC said harmonization of regulations, a central due diligence data registry and broader help to financial institutions (FIs) to understand and adapt to changing rules are three ways banks believe the global market could address some of these problems.