De-risking, the process by which banks reduce their foreign counterparty relationships so as to minimise risk and comply with regulatory pressures, may affect foreign currency transactions undertaken by banks and accelerate the trade finance gap in Africa.
Data from the ICC Banking Commission shows that 40% of global banks terminated their correspondent banking relations in 2015, largely due to the higher costs associated with anti-money laundering and Know Your Customer (KYC) compliance measures. In a separate report, SWIFT shows that de-risking has cost South African banks more than 10% of their foreign counterparty relationships between 2013 and 2015.
According to Duarte Pedreira, head of trade finance at Crown Agents Bank, foreign counterparty or correspondent banking relationships allow South African banks to trade with other banks and facilitates making and receiving payments in foreign currencies. “For South African banks to trade and transact in another currency they must have a nostro account in that currency with a foreign bank,” he explained.
He said a decline in foreign counterparty relationships is likely to affect foreign currency transactions and cross border trade especially in Africa, which has significant trade finance gap.
A conservative estimate by the ICC puts the trade finance gap in Africa between $110 billion and $120 billion, far higher than a previous estimate of $25 billion.
Speaking at a banking conference in Johannesburg, Isaac Kamuta, a managing director and head of cash management for sub-Saharan Africa at Citi said the fines levied on banks for non-compliance means risk management is of utmost importance. “We have to be extremely careful where we provide this service, how we provide this service and who we provide this service to,” he said.
In response, Stephen Mkwanazi, manager of anti-money laundering and review teams at the South African Reserve Bank (Sarb), said fines do not necessarily mean that the correspondent banking system is broken, but rather that the regulatory system is working.
High costs are also weighing on these relationships, especially as some large international banks have thousands of relationships with foreign counterparties. Harry Newman, head of banking at SWIFT said some correspondent banking relationships cost around $50,000.
Willem Kruger, head of compliance and regulatory product at Nedbank said local banks can reduce their chances of being de-risked by investing in systems and compliance. In addition to complying with local regulations, he said respondent banks must consider how their own systems fit in with international regulatory requirements.
According to Bleming Nekati, chief trade finance officer at the African Development Bank, funding gaps caused by de-risking could affect the viability of projects, slow down developments and lead to increased costs for borrowers.
As banks exercise caution when dealing with each other, particularly in so-called high risk jurisdictions, insurance companies are absorbing a significant portion of the risk associated with trade finance, said Pedreira.
Due to differing capital requirements, insurance companies have more capacity to take on risk as such banks are transferring some of the risks associated with providing trade finance onto insurance underwriters, he said.
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