Correspondent Banking: building a more resilient network, a necessity in the context of permacrisis
At a time when the world has entered a state of “permacrisis” – in other words, permanent crisis – Correspondent Banking must evolve to adapt to this new reality. The challenge? Building more resilient networks, capable of ensuring the continuity of international payments for banks and their customers in all circumstances. But without losing sight of the imperatives of economic rationality...
The impact of correspondent banking on international trade and the financial inclusion of governments and economic players is well known. Current events have also revealed its criticality at the level of each financial institution: Correspondent Banking – and its armed wing, network management – manage and protect the ability of banks to issue and receive international payments, for themselves and on behalf of their customers. It is therefore a vital function, because even a solid, cash-rich bank can technically default if its access to a currency falls.
However, the current geopolitical context, marked in particular by the invasion of Ukraine and tensions with China, is leading to a proliferation of international sanctions programmes that are complex to implement and enforce. Similarly, the spectre of bank failures has recently resurfaced, despite the stricter regulations imposed after the 2008 subprime crisis.
The current more tense context has at least one merit. It has put Correspondent Banking firmly in the spotlight, both at senior bank management level and with the authorities. In the network manager’s equation, the search for resilience has probably never been higher. Correspondent banks are chosen more than in the past for their financial strength, the robustness of their operational systems or the stability of their intraday liquidity provision.
Naturally, this need for resilience comes on top of everything else, namely the reliability, quality and price of services. The industry’s objective is to reduce the price of international payments, an objective that is of course achievable on condition that, year after year, the production costs, which include, among other things, the fees paid to the correspondent banks, are reduced. However, as competitive prices go hand in hand with high volumes entrusted, concentration is likely to continue and even accelerate over the coming years.
Choosing your correspondent banks carefully is therefore a guarantee of resilience, but it is far from the only one. In fact, there is no universal recommended mechanism. Each institution is a unique combination of size, business mix, geographical mix and risk appetite, calling for a unique response in terms of purchasing correspondent banking services. This response is constantly evolving, depending on the policy of the respondent bank as well as financial and geopolitical developments.
Striking the right balance between security and profitability
In fact, it is not a bank’s vocation to establish direct account relationships with all countries: maintaining a Nostro account represents a significant cost, which is only justified if payment volumes are high. If this is not the case, there are solutions such as working with a foreign exchange institution or opening a Nostro offshore, on the books of one of your local correspondents. This last solution involves taking indirect advantage of the correspondent banking relationship already established by another party.
Conversely, if the volumes exchanged with a partner are significant, it is in the bank’s interest to spread its risks between several correspondent banks for the same currency. Geopolitical instability can also encourage the creation of a tandem of correspondent banks with complementary profiles: for example, a local bank that is a leader in its market and an international bank with a local presence.
The current instability may also lead some banks to reconsider the value of becoming a “self-clearer” in a particular major currency, at least as a complement to their usual correspondent bank. This option is potentially easier in regions where exchange systems are open to foreign players.
Navigating a more complex and fragmented world
The final trend to be taken into account is the greater fragmentation of the payments ecosystem. It seems that Swift no longer has the universality that it once had for international payments, although it is still essential. Some countries, mindful of their sovereignty, are working alone or with others to build and promote alternatives to Swift. And it is in the banks’ interest to keep an eye on these initiatives to protect their achievability with the geographies concerned, subject of course to compatibility with their risk and compliance policies.
Alternatives to Swift may also be of interest in terms of technical resilience, even though the cooperative has a formidable track record in these areas. These solutions can take many forms, from the exchange platform managed by a fintech to direct API connections between financial institutions.
But despite this growing complexity, the current situation can only encourage us to nurture, maintain and protect the relationships between our partner banks, so that we can work together more effectively, more efficiently and more resiliently. A necessity if we are to meet current challenges.