Arab lenders had been witnessing withdrawal of correspondent banking relationships (CBRs) with the foreign counterparts - especially in the US, the UK, Germany- during 2012-15, seriously affecting trade finance, letters of credit and clearing and settlement, according to a study.
This has come out on a survey undertaken by the Arab Monetary Fund, in association with the International Monetary Fund and the World Bank, where the focus was limited to client banks (nostro accounts) with the aim of understanding how they were directly affected by the withdrawal of CBRs.
It found that the number of accounts being closed appeared to be increasing, with 63% of the participant banks reporting the closure of CBR accounts in 2015 against 33% in 2012.
About 40% of the participant banks in the Arab region indicated the US as being the home jurisdiction of the largest share of banks that are withdrawing CBRs, followed by the UK, Germany, Saudi Arabia, the UAE, France, Canada, Italy, Switzerland, and Australia.
Where banks have experienced a withdrawal of CBRs, almost 63% of them indicated they were able to find replacement CBRs, it said, adding for the rest, 17 of participant banks that had their CBRs terminated and/or restricted managed to establish alternative arrangements to meet their needs, while a significant portion, 20% of respondents are still unable to find replacement CBRs or alternative options.
The overall risk appetite of foreign financial institution; changes to legal, regulatory or supervisory requirements in foreign financial institutions’ jurisdiction; lack of profitability of certain CBRs services and products; sovereign credit risk rating in Arab countries’ jurisdictions; and concerns on money laundering/terrorism financing risks in Arab countries’ jurisdictions were believed to the main causes for foreign financial institutions’ decisions to terminate or restrict CBRs with banks operating in Arab region.
Banks in the Arab region that have experienced a significant decline in the scale of CBRs indicated that the impact on their ability to conduct foreign currency denominated capital and current account transactions is significant in the US (55%), followed by Europe and Central Asia (45%).
Consistent with those findings, the ability to conduct international wire transfers in US dollars has been most significantly affected, followed by euro, pound sterling, Saudi Arabian riyal, Japanese yen, Australian dollar, Canadian dollar and UAE dirham.
The products and services identified by those banks as being most affected by the withdrawal of correspondent banking are: Trade finance, letters of credit, and documentary collections (58%), and clearing and settlement (54%), it said, adding a majority of participant banks report that money transfer operators and other remittance services providers are most affected (51%), followed by small and medium exporters (46%).
“The inability of banks in some Arab countries to enter into correspondent relationships with foreign banks could have a deleterious impact on trade and remittances and ultimately on real economic activity. Consequently, this is an increasingly important challenge facing Arab countries,” the survey said.
Limiting the further withdrawal of CBRs will require identifying potential solutions to issues perceived as key drivers behind this withdrawal, including solutions targeted at addressing the most affected products and clients; it said.
These could include further efforts to strengthen regulatory regimes, addressing other sources of risks, as well as establishing and maintaining an open dialogue and regular discussions among regulators in concerned jurisdictions, according to the report.
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