Correspondent Banking’s Steady Decline

The world’s infrastructure for facilitating global payments is in decline, according to the latest report from the Financial Stability Board (FSB).

The FSB is an international body representing G-20 economies tasked with keeping tabs on the financial system. (They just released a new framework intended to address “too big to fail” banks.) Payments are a fundamental building block of our modern economy so the health of correspondent banking poses a potential systemic risk.

According to a World Bank survey commissioned by the FSB, half the banking authorities that responded experienced a decline in correspondent banking relationships. Three quarters of large banks admitted that the number of correspondent accounts they had declined in the last three years. Most local and regional banks also saw a decline in access.

The survey group represents 91 banking authorities, 20  large banks and 170 local and regional banks. (The World Bank report will be published later this year.)

These are worrying developments for the FSB because, as the report notes, the “ability to make and receive international payments via correspondent banking is vital for businesses and individuals, and for the G20’s goal of strong, sustainable, balanced growth.”

The report adds:

At the extreme, if an individual bank loses access to correspondent banking services, this may affect its viability and if a country’s banks more generally face restricted access then it may affect the functioning of the local banking system. In addition, loss of correspondent banking services can create financial exclusion, particularly where it affects flows such as remittances which are a key source of funds for people in many developing countries.

The reason for this broad decline, the report suggests, is due to a decrease in risk appetites by banks, regulatory uncertainty and the rising cost of compliance.

The FSB’s findings mirrors those of the Bank of International Settlement, which found that correspondent banks were reducing the number of relationships they maintained due to regulation and risk tolerance.

In other words, we’ve reached peak correspondent banking because the world’s biggest banks, aside from the most risk-free and well tread corridors, simply don’t want to be in the business anymore.