International banks are cutting back on the networks they maintain in developing countries, an unintended consequence of global regulatory reforms that could make it harder for businesses to grow and create jobs in emerging markets, according to a global survey of banks released today by IFC, the private sector arm of the World Bank Group.
Globally, 27 percent of banks surveyed noted declines in their correspondent banking relationships (CBRs) – financial institutions that provide services on behalf of other institutions – forcing them to reduce vital services. The challenge is most critical in Sub-Saharan Africa where 35 percent of banks reported a decline in these essential relationships—a major risk for countries’ economies heavily reliant on imports.
“We are concerned,” said IFC CEO, Philippe Le Houérou. “In emerging markets, the business environment has often been challenging for banks and their customers, but a decline in correspondent banking disrupts the financial connections that countries and businesses need.”
Restricting the availability of trade finance, wire transfers, deposits and other services could have a severe impact in developing countries, where they are a lifeline to the wider world. The WTO estimates the existing global trade gap to be $1.4 trillion, and it exceeds $100 billion in Africa alone, a gap the decline in CBRs will exacerbate further. An IMF study in April 2017 said the decline in these relationships could undermine affected countries’ long term growth and financial inclusion prospects.
The survey, the first extensive survey of banks in emerging markets on the issue, polled 300 banks active in 92 countries. The institutions surveyed have a total of $5 trillion in assets—roughly 10 percent of all emerging-market banking assets.
Emerging markets banks are having to address multiple sets of new, sometimes conflicting, compliance requirements and are spending large amounts to upgrade their processes, hire staff, and upgrade software. Some 78 percent expected the costs of regulatory compliance to continue to rise, further pressuring their ability to serve their customers with essential services.
Over the past decade, policymakers have taken much-needed steps to bolster the global financial system with new rules against unnecessary risk-taking, money laundering, and terror funding. These reforms will help safeguard the system from future crises. But increased capital standards, rising compliance costs, and the threat of large fines are also leading financial institutions to rethink their cross-border networks, the survey confirmed.
Survey participants identified three solutions that could help address the issue, including greater harmonization of regulatory requirements, a centralized registry for due diligence data, and assistance with understanding and adaption to the new standards as measures. A solution will require multiple stakeholders across the international community to formulate a comprehensive response.
“Trade, economic growth, and the remittances that families depend on are at risk when banking relationships deteriorate,” said Marcos Brujis, Director of IFC’s Financial Institutions Group. “By working together, multilateral institutions, regulators, and banks can help ensure that necessary reforms don’t create unintended costs for the most vulnerable people.”