18 September 2024

CEPR: The impact of de-risking by correspondent banks on international trade

By Borchert, De Haas, Kirschenmann, Schultz: The sharp decline in correspondent banking over the past decade has raised concerns that the associated disruptions in cross-border payments could hamper international trade and economic growth.

The sharp decline in correspondent banking over the past decade has raised concerns that the associated disruptions in cross-border payments could hamper international trade and economic growth. This column combines data on terminated correspondent bank relationships with firm-level data from emerging Europe to show that when local respondent banks lose access to correspondent services, their corporate clients experience a decrease in exports. Affected firms only partially offset lost exports with higher domestic sales, resulting in lower total revenues and employment. The authors outline various steps governments can take to mitigate the negative impact of correspondent banks' retrenchment. 

Global banking has changed substantially in the wake of the global financial crisis, as new regulation, stricter supervision, and stronger risk management prompted international banks to scale back foreign activities (Fratzscher and Bremus 2015, Claessens 2017, De Haas and Van Horen 2013, 2017). A prime example of this retrenchment is the sharp decline in correspondent banking. Driven by stricter anti-money laundering and counter-terrorism financing rules, many global banks have curtailed their correspondent banking services, especially in low-income countries.

Correspondent banks hold deposits from other banks (respondents) and provide them with cross-border payment services, enabling the local banks of exporters and importers to make trade-related payments without direct bilateral account relationships. Correspondent banks also offer trade finance services, such as letters of credit (Schmidt-Eisenlohr and Niepmann 2016), which mitigate non-payment or non-shipment risks. Through these activities, these banks enable trade transactions that might otherwise not occur due to financial constraints or a lack of trust between counterparties....

 more at CEPR

© CEPR - Centre for Economic Policy Research