The Banking Executive Magazine - Issue 150, June 2021

The Seventh Annual Arab – Cypriot Forum Many western banks, though, have dismissed entire regions and coun- tries – and the impact in terms of fi- nancial exclusion that this is having in some parts of the world has been identified as a serious social threat by the G20 nations and World Bank among others. De-risking by Western banks has several consequences: 1. It left a gap in the market in some regions and the signs are that eastern financial institutions, pre- dominantly Chinese banks, are moving to fill the gap. Correspon- dent banking relationships oper- ated by Chinese banks increased over 30 times since 2009. These trends suggest a continued shift in correspondent banking relation- ships from West to East. 2. Cross border transactions, as you know, are predominantly con- ducted in USD. But, research shows a close to 20% fall in US dollar correspondent relation- ships since 2013 with the accel- eration of the de-risking movement and the introduction of the sanctions policy. This will undoubtedly have a twin ef- fect: negative on the dollar and positive on other currencies, no- tably the renmimbi. 3. Correspondent relationships transacting in euros have also de- clined, by 23% since 2009, but this is partly due to the integration of cross border payments across Europe into the Single European Payments Area (SEPA). 4. Reducing their correspondent banking relationships as they shun high-risk countries or re- gions, has generated for money center banks a loss of banking services revenue as a result. 5. By moving to more lenient regu- latory environments, banks are dragging money flows out to risky settings. ‘The irony is that regulation de- signed to protect the global finan- cial system is, in a sense, having an opposite effect and forcing whole regions outside the regulated finan- cial system.’ 6. Correspondent banking has be- come more concentrated, to the potential detriment of market in- tegrity, financial inclusion and economic prosperity. If entire customer segments lose access to these financial services, then trade, investment, remittances, economic growth and sustainable development itself may be en- dangered. So, what is the ‘antidote’ to blanket de-risking? 1. It is for correspondent banks to adopt a more granular approach to risk assessment and due dili- gence, which can securely and quickly determine the risk of a transaction in a high-risk region. Technology is a determining cost- effective tool in this exercise. 2. Local banks also have some homework to do in order to demonstrate that they meet inter- national compliance standards, because they have the right com- pliance systems, the right processes and the right culture in place. They have to show that they can be trusted to act as local correspondent banking partners for the large international clearing banks. ‘Since the financial crash of 2008, we have seen significant commit- ment from financial institutions in emerging economies to demonstrate that they are not high risk.” Often trading off profitability and sacrific- ing client relations. 3. On the authorities side, we call on authorities to pursue their ef- forts to counter financial exclu- sion by expanding and the BANKING EXECUTIVE 48 ISSUE 150 JUNE 2021