Correspondent Banking: A Complex System Under Strain
What is Correspondent Banking?
Correspondent banking is a system used for transferring payments between banks in different jurisdictions. It involves correspondent banks acting as intermediaries to facilitate cross-border transactions.
Types of Correspondent Banking
There are two primary types of correspondent banking:
Traditional Correspondent Banking
- In this type, a respondent bank enters into an agreement with a correspondent bank to execute payments on their behalf.
- The respondent bank’s customers do not have direct access to the correspondent account.
Nested Correspondent Banking
- This involves a bank’s correspondent relationship being used by multiple respondent banks, which do not have a direct account relationship with the correspondent bank.
Payable-Through Accounts: A Complicated Aspect
A payable-through account or “pass-through” account is where the respondent bank allows its customers to directly access the correspondent account to conduct business on their own behalf. This adds complexity to the system, as it blurs the lines between traditional and nested correspondent banking.
Recent Developments in Correspondent Banking
The correspondent banking landscape has undergone significant changes:
Cutbacks in Relationships
- Correspondent banking relationships are being reduced due to high compliance costs.
- Perceived riskiness of jurisdictions is also a factor.
- Lack of available information for adequate risk assessment leads to cutbacks.
Changes in Relationships
- Higher-risk services like nested correspondent banking and payable-through accounts are being scaled back.
- Traditional correspondent banking dominates remaining relationships.
Concentration of Relationships
- A small number of service-providing institutions dominate the market due to cutbacks in relationships.
Increasing Costs
- Establishing and maintaining correspondent banking relationships become increasingly costly.
Conclusion
Correspondent banking is becoming more complex, with banks facing challenges in establishing new relationships, especially for smaller banks in specific jurisdictions. The industry must adapt to these changes to remain viable.