This progress report for G20 Leaders updates on the FSB’s action plan to address reductions in correspondent banking relationships. It was published together with a data report that provides further information to assess the decline in correspondent banking relationships.
A decline in the number of correspondent banking relationships is a concern because in impacted jurisdictions it may affect the ability to send and receive international payments or drive payments underground with potential adverse impacts for trade, growth, financial inclusion, financial stability and the integrity of the financial system. The FSB launched its four-point action plan to assess and address the decline in correspondent banking. The plan covers:
- Further examining the dimensions and implications of the issue;
- Clarifying regulatory expectations, including guidance from FATF and BCBS;
- Domestic capacity-building in jurisdictions that are home to affects respondent banks; and
- Strengthening tools for due diligence in correspondent banks.
The progress report highlights good progress in implementing the action plan; including action by the Financial Action Task Force (FATF) and Basel Committee on Banking Supervision (BCBS), in clarifying regulatory guidance; further support on technical assistance; and work by the Committee on Payments and Market Infrastructures (CPMI) to reduce due diligence costs for correspondent banking relationships. However, the data report shows a continued decline in the number of correspondent banking relationships.
The decline in relationships appears to lead to a greater concentration, where countries and banks rely on fewer correspondent banks, and longer payment chains, which means that an increasing number of intermediaries are involved in processing the same payment. Relationships are most affected in smaller countries and jurisdictions for which the compliance with standards for anti-money laundering and combating the financing of terrorism (AML/CFT) is insufficient or unknown.
A range of reasons account for the reduction including industry consolidation, reduced profitability from these activities, risk appetites for correspondent banks and various reasons related to AML/CFT requirements.
Increased concentration in the correspondent banking market may be a natural response to the profitability issue and may also facilitate the monitoring of correspondent banking relationships for AML/CFT. However, this concentration could lead to structural instabilities in the payment traffic of affected jurisdictions, which is why the FSB has agreed further work including (i) further monitoring of data on trends in correspondent banking relationships; (ii) statements by regulators to clarify expectations following the publication of new BCBS and FATF guidance; (iii) further technical assistance to the affected jurisdictions; (iv) continued support for technical solutions such as Know Your Customer utilities and the Legal Entity Identifier; and (v) new exploratory work to identify whether there are issues relating to remittance providers’ access to banking services that are not already being dealt with through existing initiatives
The FSB will publish its next progress report in December 2017.