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Rankings & dataOctober 15 2015

Ranks of correspondent banks grow thinner

Correspondent banking remains an important channel for financial flows within the eurozone, but the market is becoming increasingly concentrated in the hands of a few institutions
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The number of correspondent banking relationships are falling as the popularity of alternative payment systems grows and the level of regulatory scrutiny increases.  

According to the European Central Bank’s (ECB) ninth biennial survey on correspondent banking, the biggest European lenders are severing links with their smaller peers, despite the fact that a large volume of payments are still made through correspondent banking channels. In 2014, the number of linkages between banks hit an all-time low of 12,207 (see chart 1), a drop of over 2,000 from 2012, going by loro accounts (accounts of the service-providing banks).

Chart 1 FW

 

There are several reasons for this. As the ECB survey points out, in the pre-euro days the need to maintain correspondent relationships was much greater due to the profusion of different currencies on the continent. Much of this business has been taken up by the euro payment systems, which is how the majority of payments in the eurozone are now settled (see chart 2).

Chart 2 ver 2

Additionally, in the wake of the financial crisis, the industry went through a wave of consolidation, and many banks became more reluctant to maintain relationships with institutions whose reputations were tarnished by significant losses or accusations of financial mismanagement for misdeeds.

The most recent decline can be attributed to the spike in the cost of creating and maintaining a correspondence relationship. In 2013, the EU adopted legislation that reflected the global Financial Action Task Force’s anti-money laundering and know-your-customer standards. This was followed in January 2014 by a set of guidelines issued by the Bank for International Settlements that supplement these standards.

The legislation requires that banks not only know their customers but also their customers’ customers, which can substantially increase the costs of doing business abroad.

Moreover, the regulatory pressure European banks are facing is global, with the US leading the charge. Last year there was a $9bn settlement between French bank BNP Paribas and US regulators over violation of sanctions against Cuba, Iran and Sudan. Other European lenders have also been charged by US regulators, including HSBC, UBS and ING, leading to increased caution in correspondence relationships.

Interestingly, although the daily turnover in correspondent transactions also declined to €966.3bn in 2014 (see chart 3), it still remains above the pre-crisis levels.

Chart 3 FW

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