The great bank retreat as the rising cost of compliance takes its toll

Trade Financing Matters welcomes this post from Frank Carr-Allinson, Head of Trade Services Advisory at Commerzbank, on how increasing compliance costs are causing many banks to scale back their correspondent banking networks – and what this means for global trade.

Banks have been warning for some time that the costs of compliance are becoming ever greater. This, together with limited economic growth in many banks’ home markets and growing regulatory restrictions, means many banks are becoming more selective about the products and services they wish to offer. Inevitably, this also means retrenching from less profitable markets to focus on core strengths in fewer countries. But at what cost?

Ultimately, the casualties of this shift will be the companies in emerging market countries that rely on their banks’ ability to process documentary trade with counterparts around the world. But with the cost of providing trade finance to clients in higher-risk areas becoming more expensive, many banks are rethinking whether it is worth maintaining certain correspondent banking relationships – potentially resulting in these banks and regions being cut off from the global financial markets.

An increasing burden

Banks have, of course, prioritised compliance requirements, investing in personnel, training and tools in order to ensure they are compliant with the new and changing wave of regulations. However, the cost of doing so will weigh especially heavily on smaller banks, making the industry less competitive and raising barriers to entry. Even larger banks are proceeding to substantially reduce counterparts in a bid to reduce overheads.

Indeed, banks now have to perform rigorous checks each time they set up a new Relationship Management Application (RMA) – the SWIFT test key to communicate with another bank. Not only do they have to screen their bank counterparties, they also need to screen every single subsidiary of that bank. Such thorough due diligence can cost over US$30,000. And this calls into question the return on investment of every single relationship.

Clearly, for a global bank like Commerzbank, with 5,000 correspondent banking partners there are hefty compliance costs to pay. And while our extensive network means we are subject to heightened scrutiny from the regulators, we see the value and potential of keeping this network open. Certainly, correspondent networks remain the best way for corporates and banks alike to access hard-to-reach, but strategically important, emerging markets with the combination of global coverage and local expertise. At the same time, emerging market exporters rely on their local bank being connected to a global trade finance network in order to seize international trading opportunities.

As such, banks have a responsibility to ensure that smaller economies do not face financial abandonment. For example, Commerzbank helps smaller players stay involved in the global trade business by allowing them to leverage its own network and trade processing facilities. Likewise, for larger banks that may be considering focussing their strategy outside the trade arena, Commerzbank also provides a platform to concentrate trade business flows, which can offer economies of scale.

Transaction banking is under pressure and with cost and compliance pressures only set to grow in the current environment, the provision of global trade finance may be put at risk, at least in terms of its breadth. As such, banks must reassess the economic value of trade alliances in delivering value to their corporate customers. Most banks are questioning their underlying business models and it would seem that the age of banks being universal and offering all things financial to all people is over.

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