BIS Describes Peak Correspondent Banking

Banks around the world today rely on the correspondent banking system to facilitate international payments. It’s no wonder then that the health of that system is of utmost importance to central banks around the world.

That’s why the Bank for International Settlements (BIS)—sometimes described as the central bank for central banks—commissioned a report on the state of correspondent banking by the Committee on Payments and Market Infrastructures (CPMI), which was published this month.

The report doesn’t drop too many surprises. The correspondent banking system is feeling the strain of broader trends, notably around compliance costs and risk tolerance. Part of this might be the “bigger-is-better” and “one-size-fits-all” model running its course. As such, rather than seeing a more integrated, interconnected network, we’re seeing just the opposite, where the large correspondents are limiting the number of relationships they maintain over time.

As the report explains:

Banks have traditionally maintained broad networks of correspondent banking relationships, but there are growing indications that this situation might be changing. In particular, some banks providing these services are reducing the number of relationships they maintain and are establishing few new ones. The impact of this trend is uneven across jurisdictions and banks. As a result, some respondent banks are likely to maintain relationships, whereas others might risk being cut off from international payment networks. This implies a threat that cross-border payment networks might fragment and that the range of available options for these transactions could narrow.

In a sense, the report describes the arrival of some sort of peak correspondent banking scenario, which the CPMI chalks down to a more stringent regulatory environment and an “increased sensitivity to the risks associated with correspondent banking.” The victims of this contraction are bit players, partners and corridors that don’t produce sufficient volumes, exist in jurisdictions perceived as extra risky or serve customers that are difficult to KYC. The result is that whole regions are getting cut out of the global payments network completely.

The report offers various recommendations for mitigating these costs, such as employing smarter KYC tools, broader use of legal entity identifiers (LEIs), information-sharing programs, and more efficient messaging standards. But while these measures will help mitigate these issues, the CPMI admits that “members are aware and would like to stress that, in isolation, these technical measures will not resolve all such issues.”

Read the full BIS report here.