G20 watchdog says no let up in correspondent banking decline

By Huw Jones

LONDON (Reuters) - The decline in correspondent banking, a crucial channel for moving cash from one country to another, shows no sign of slowing despite measures agreed in 2015 to stem the slide, global regulators said on Tuesday.

Banks have been pulling out of the business for a variety of reasons from not making enough money to industry consolidation to the fear of falling foul of tougher new rules designed to prevent money laundering and terrorist financing.

The Financial Stability Board (FSB), which coordinates financial regulations for the Group of 20 countries (G20), said the places most affected tended to be small economies or those finding it difficult to apply the new rules.

The decline has raised concerns that some payments will pass through unregulated cash couriers instead, harming international trade and driving some people out of the world's financial system, the FSB said in a report.

The FSB unveiled a four-point action plan in November 2015 to curb the decline and has since made clear that correspondent banks don't have to know their local customer's customer but the fall has shown no signs of abating.

"The decline in the number of correspondent banking relationships is continuing," the FSB report said.

It said all regions had been hit to a varying degree, with the Caribbean and small states in the Pacific suffering the worst and Eastern Europe hit hard as well. The FSB said transactions in U.S. dollars and euros were the most affected.

In correspondent banking, a global bank typically channels payments in country to a local bank with no international network in another country.

PAYMENT VOLUMES STABLE

Heidi Toribio, global head of banks and broker dealers at Standard Chartered, a correspondent bank, said there was no simple solution to the decline.

But advances in technology were starting to automate payments processes, making it harder to manipulate invoices.

"Regulators globally and locally are coming together with the industry and we're having the right conversations," Toribio said.

The FSB said its latest update for G20 leaders meeting this week in Hamburg, Germany, draws on better data after sampling 300 banks in 50 countries, and payment messages from SWIFT, a global network that links lenders.

"It is too early to tell what the effects of measures taken so far will be, and to what extent they will stem the decline," the FSB said.

The volume of payments remains roughly unchanged, but the involvement of fewer banks means longer payment chains and countries relying on fewer international lenders, the FSB said.

The FSB will convene a meeting of private and public sector bodies on the sidelines of the International Monetary Fund-World Bank annual meetings in October to discuss its findings so. Another progress report is due in December.

The watchdog will also obtain deeper and more frequent data on the sector from SWIFT over the coming year to monitor progress, while the World Bank is studying the impact of the decline on remittances to see if costs are being driven up.

Alexander Karrer, chair of the FSB's Correspondent Banking Coordination Group, and Deputy State Secretary at the Swiss Federal Department of Finance, said the banking industry and regulators would continue to work together to make improvements to simplify due diligence in correspondent banking.

(Editing by David Clarke and Alexander Smith)