De-risking: implications and how to address them

The TFP is partnering with the Centre for European Economic Research (ZEW) in Germany to look into the drivers and consequences of reduced access to correspondent banking

Supporting trade is one of the ways the EBRD helps to foster integration and strengthen the economies in which it invests. The EBRD Trade Facilitation Programme (TFP) plays an important role in achieving this goal by promoting and facilitating international trade to, from and within the countries where the EBRD operates.

And it’s successful. In 2016 – the TFP’s best year to date – business volume rose to €1.543 billion from €867 million in 2015. The programme now includes more than 100 issuing banks, with limits exceeding €1 billion in total, and over 800 confirming banks throughout the world.

However, evidence is mounting that the pool of international banks willing to act as confirming banks has decreased considerably during recent years.

The reduction appears to be part of a global de-risking trend in correspondent banking where a combination of tightened regulation, ballooning compliance costs in financial crime regulation and low profitability causes international banks to restrict or even terminate the provision of correspondent banking services to certain regions.

Decreased provision

The Financial Stability Board has estimated, for example, that the number of banks willing to provide correspondent banking services in Montenegro has decreased by 36 per cent and even by 56 per cent in Moldova since 2011.

In other countries, the withdrawal of correspondent banks has been less pronounced, but the consequences are nonetheless tangible. An increasing number of local banks report that they face difficulties in finding international banks that are willing to facilitate international payment transactions, act as the confirming bank in trade finance products or provide international clearing services.

This limited access to correspondent banking is a cause for considerable concern and threatens the EBRD’s objective of supporting financial and economic development. As international banks terminate the provision of cross-border services, local banks find it increasingly difficult to supply their customers with products that allow them to engage in international trade.

This in turn makes it challenging for local firms to import important production inputs or sell their goods internationally. In fact, some firms have reported that they have had to cancel their international trade activities altogether because they were not able to make international payments and/or obtain trade financing.

Risk perception

There is also little hope for change; continued concerns about money laundering, sanction violations and terrorism financing make it unlikely that international correspondent banks will return to countries that are perceived to have a high risk of financial crime.

This puts the quest for adequate responses to the withdrawal of correspondent banks to the top of the TFP’s agenda.

In a first step, the TFP team will conduct research in order to build an in-depth understanding of the tectonic shifts in the correspondent banking market in recent years. Joining with scientists from the Centre for European Economic Research (ZEW) in Mannheim, Germany, the TFP team will look deeply into both the drivers and implications of reduced access to correspondent banking for local banks and their customers.

“In a way, correspondent banking serves as an essential link between local firms and the global economy,” says Karolin Kirschenmann, deputy head at the Department of International Finance and Financial Management at ZEW.

“When the link is severed, the interruptions in international trade can be substantial. Together with the EBRD we want to understand how exactly the withdrawal of international correspondent banking affects local economies in emerging Europe – and what can be done about it.”

At the core of the project will be a comprehensive survey of issuing and confirming banks in the economies where the EBRD invests that will allow precise insights into how, where, when and why correspondent banks terminate the provision of services.

The survey will then be paired with statistical analyses to investigate how exactly the reduced availability of correspondent banking affects trade in the EBRD regions. For this, the researchers will examine in detail how local firms adjust their international trade activity when local banks face limited access to correspondent banking.

Together, the survey and the statistical analyses will then form the basis for developing ways to address de-risking in the economies where the EBRD operates. The survey will be conducted at the end of 2018 and the results will be made available by mid-2019.

Please note

The results of the survey will be treated in the strictest confidence. Results will be published for the EBRD regions as a whole only, making it impossible to identify individual correspondent banks or local banks.

Correspondent banking serves as an essential link between local firms and the global economy. When the link is severed, the interruptions in international trade can be substantial.

Karolin Kirschenmann