Withdrawal of Correspondent Banking Relationships (CBRs) in the Arab Region
6th September 2016, Bachir El Nakib (CAMS), Senior Consultant Compliance Alert LLC
The Arab Monetary Fund (AMF), the International Monetary Fund (IMF) and the World Bank are pleased to announce the publication of a report on the findings of a survey on the withdrawal of Correspondent Banking Relationships (CBRs) in the Arab region. This survey, which was undertaken from February through June 2016, aimed to assess to what extent banks operating in the Arab region have seen terminations and/or constraints on the operation of their CBRs over the past four years (2012-2015), to identify the underlying causes, and to collect evidence on how this withdrawal has affected banks’ products and services and their client segments.
The report is the result of a continued and collaborative engagement by the AMF, IMF, World Bank Group, and the Central Banks in the Arab region. The report synthesizes the findings of the survey and highlights some key issues and policy questions that should be addressed to mitigate the impact of the withdrawal of CBRs on banks operating in the Arab region.
The report notes that the decline in CBRs, experienced by banks in the Arab region significantly affects banks’ ability to service certain client segments and to provide certain products, as well as to conduct foreign-currency-denominated capital and current-account transactions. The report also highlights the need to pursue further efforts to strengthen regulatory regimes, as well as to establish and maintain an open dialogue and regular discussions among regulators in the jurisdictions involved.
The report does not intend to provide an exhaustive overview or detailed quantitative data on correspondent banking practices in the Arab region. In addition, a quantitative discussion of the economic effects of the withdrawal of CBRs was outside the scope of this report. Nevertheless, the results of this survey make an important contribution to the ongoing policy debate regarding the need for and design of solutions to the challenge created by the withdrawal of CBRs.
In this regard, AMF, IMF and World Bank Group stand ready to support further efforts in addressing CBRs issues in the Arab region in cooperation with the Central Banks in the region, and according to each institution’s mandate and expertise.
1. From February through June 2016, the Arab Monetary Fund (AMF), in partnership with the International Monetary Fund (IMF) and the World Bank, undertook a survey on the causes and impact of the withdrawal of correspondent banking1 relationships (CBRs) from banks operating in the Arab region. The survey aimed at assessing to what extent Arab banks have seen terminations/restrictions of their CBRs over the past 4 years (2012-2015), identifying the underlying causes, and collecting evidence on how this withdrawal has impacted banks’ products & services and client segments. The focus of the survey was limited to client banks (Nostro accounts 2 ) with the aim of understanding how they were directly affected by the withdrawal of CBRs.
2. A total of 216 banks operating in seventeen Arab countries provided answers to the survey (participant banks). Despite considering the data gathered as representative, this report does not intend to provide detailed quantitative data that presents an exhaustive overview of the whole correspondent banking practices in the Arab region. In particular, a quantitative discussion of the potential economic effects of a withdrawal of CBRs was outside the scope of this report. Nevertheless, the results of this survey make an important contribution to the ongoing policy debate regarding the need for and design of solutions to the challenge created by the withdrawal of CBRs.
3. Roughly 39 percent of the participant banks in the Arab region indicated that they have experienced a significant decline in the scale and breadth of CBRs, while 55 percent of them have reported no significant change, 5 percent indicated an increase and the residual of almost 1 percent stated as unknown response. In addition, the number of accounts being closed appears to be increasing, with 63 percent of participant banks reporting the closure of CBR accounts in 2015 versus 33 percent in 2012.
4. About 40 percent of the participant banks in the Arab region indicated the United States (USA) as being the home jurisdiction of the largest share of banks that are withdrawing CBRs, followed by United Kingdom (UK), Germany, Kingdom of Saudi Arabia (KSA), United Arab Emirates (UAE), France, Canada, Italy, Switzerland, and Australia. Where banks have experienced a withdrawal of CBRs, almost 63 percent of them indicated they were able to find replacement CBRs. For the rest, 17 percent 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 percent of respondents are still unable to find replacement CBRs or alternative options.
5. The main causes/drivers in foreign financial institutions’ decisions to terminate or restrict CBRs with banks operating in Arab region are believed to include the following according to their relative ranking:
(1) overall risk appetite of foreign financial institution,
(2) changes to legal, regulatory or supervisory requirements in foreign financial institutions’ jurisdiction,
(3) lack of profitability of certain CBRs services and products,
(4) sovereign credit risk rating in Arab countries’ jurisdictions, and
(5) concerns about money laundering/terrorism financing risks in Arab countries’ jurisdictions.
6. 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 USA (55 percent) followed by Europe and Central Asia (45 percent). Consistent with those findings, the ability to conduct international wire transfers in US dollars (USD) has been most significantly affected followed by Euro, pound sterling (GBP), Saudi Arabia Riyal (SAR), Japanese Yen (JPY), Australian Dollar (AUD), Canadian Dollar (CAD), and United Arab Emirates Dirham (AED).
7. 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 percent), and clearing and settlement (54 percent). A majority of participant banks report that money transfer operators (MTOs) and other remittance services providers are most affected (51 percent) followed by small and medium exporters (46 percent). Moreover, participant banks reported that the Time/Cost involved in finding alternative channels to offset the impact of a withdrawal of CBRs is significant, and the terms and conditions of replacements were not comparable to the previous CBRs, with some noting a substantial increase in pricing.
8. The outcomes of this survey should be considered as food for thought for further analysis, particularly, the perceived drivers of the decision to withdraw CBRs from banks operating in the Arab region. A set of key issues and questions for more consideration are highlighted in section 3 of this report.
Hence, the “de-risking” phenomenon involves financial institutions’ practices of terminating or restricting business relationships with clients or categories of clients to avoid rather than manage risks. It is a misconception to characterize “de-risking” exclusively as an anti-money laundering/ combatting terrorism financing issue. In fact, “de-risking” can be the result of various drivers, such as concerns about profitability, prudential requirements, anxiety after the global financial crisis, and reputational risk.