24 February 2015

ECB: Ninth survey on correspondent banking in euro

Correspondent banking relationships play an important role in the processing of payment transactions in euro. They ensure that payments flow between credit institutions, as well as allowing indirect access to payment systems, thereby representing an important link in the payment chain. Given their relevance for the smooth functioning of payment systems, correspondent banking services have been within the scope of the Eurosystem’s oversight activity since the European Central Bank (ECB) was established.

The Eurosystem has conducted surveys on correspondent banking business since 1999 in order to monitor its importance, size and development. Participation in the surveys has always been voluntary. In principle, those banks invited to take part have been the largest in terms of general business size (based, for example, on indicators such as balance sheet size, staff numbers and the size of the branch network) and/or are known to be very active in providing payment services. The most recent survey (the ninth) was conducted in March 2014 and, like the eighth survey, only covered banks with an average daily turnover on loro accounts of at least €1 billion. This threshold was introduced in 2012 in order to increase the overall efficiency of the survey. 22 banks located in eight euro area countries participated in the ninth survey.

Since correspondent banking business in euro continues to be highly concentrated among the largest banks in the euro area, it is likely that the surveys cover a very high proportion of all correspondent banking business. However, it is acknowledged that nostro account turnover may be underrepresented, as the largest banks mostly manage loro accounts in bilateral relationships.

This report presents the results of the ninth survey and provides some risk and policy considerations with regard to correspondent banking. It is the second survey to be published after the eighth survey in 2013. The report also provides a trend analysis of developments in the correspondent banking business by comparing the results of the 2014 survey with the data obtained from the previous surveys.

The results of the ninth correspondent banking survey confirm that correspondent banking remains an important channel for effecting payments in euro. As in previous surveys, both the number and value of payments processed by correspondent banks were very large. For instance, the total daily turnover of euro transactions settled through correspondent banking arrangements averaged almost €1 trillion (loro transactions of the banks responding to the survey). However, most payments originated through correspondent banking arrangements are settled through payment systems, while payments processed solely through correspondent banking arrangements represent just over 12% of the total value (and less than 1% of the total volume) of payments processed by the respondent banks.

The rapid growth in loro turnover in 2012 has now reversed with the 2014 figure slightly below that of 2010. This could be explained by some large banks beginning to move away from correspondent banking to payment systems for low volume/ high value payments following the introduction of the Single Euro Payments Area (SEPA). SEPA was initially scheduled to be fully implemented in the euro area in February 2014 but was subsequently delayed to August 2014. However, in terms of value, the wholesale correspondent banking segment continues to be much larger than the retail correspondent banking segment. The latter has declined even further owing to the establishment of a new clearing house which has had an impact on the results for domestic retail banks’ use of correspondent banks.

As regards concentration in correspondent banking business, the survey results suggest that the growth seen in previous surveys has ceased but at a very high level. Therefore, this continues to warrant the attention of payment system overseers, as the default of one of the larger and most interconnected correspondent banks might quickly trigger a domino effect on their respective customer banks and/or service-providing banks, as well as the risk of spillover to interdependent payment systems. Besides operational risk, liquidity and credit risks also pose a significant threat in the correspondent banking business, with intraday credit exposures usually being uncollateralised.

The survey also indicates that, as a consequence of the high concentration of the business, major developments that affect the policies of only a subset of the respondent banks, such as the establishment of a new domestic clearing house, can nevertheless have a strong impact on the overall results of the survey. This could have implications for the future should the number of respondents continue to decline1 and if the non-participating banks process high volumes of payments and/or high values. It is also too early to tell what the long-term influence of SEPA will be with regard to correspondent banking, but there is evidence that at least some banks are using it as an alternative where their correspondents are reachable through the SEPA framework.

Risks in correspondent banking are relevant for both the prudential supervision of banks and the oversight of payment systems. Although the perspective of payment system overseers is traditionally somewhat different from that of banking supervisors, their objectives are closely interrelated.

The Eurosystem has not introduced specific oversight requirements for correspondent banks so as to avoid any double regulation of these institutions. The Eurosystem has instead relied on banking supervision, working together with supervisors at various levels (European, global and national) with the aim of ensuring that risks in correspondent banking are consistently and uniformly covered in the euro area. The Single Supervisory Mechanism (SSM) – the new system of banking supervision comprising the ECB and the national competent authorities of the participating countries – is likely to facilitate such close cooperation.

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