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Correspondent banking faces existential crisis warns PwC

20 November, 2015 Written by Elliott Holley

Extracted from: http://www.bankingtech.com/404142/correspondent-banking-faces-existential-crisis-warns-pwc/

De-risking, motivated by short-term risk-reward calculations, should not be allowed to kill off one
of the cornerstones of the global financial system. Rather than abandon correspondent banking
relationships, banks should be thinking about investing in and automating their risk controls,
according to a new whitepaper by PwC.

The rise of tough new financial regulation in the years since the financial crisis has seen pressure mount
on the correspondent banking network. The international money transfer business has been particularly
affected, especially in poorer countries such as Somalia. Many banks have pulled out, ending
relationships and closing correspondent accounts. Barclays was at the centre of a Parliamentary
debate over the issue in the UK House of Commons in 2013. The bank stated that it feared being fined by
the regulator if it did not reduce what it perceived as exposure to risky businesses.

The report, Correspondence course: charting a future for US-dollar clearing and correspondent banking
through analytics, adds that financial institutions are facing significant penalties for failure to comply with
AML and counter-terrorist financing rules. Apart from enforcement action, one component of the
regulatory push is an increased scrutiny on correspondent accounts. PwC suggests that the banking
industry faces an existential crisis for the financial services industry, since the closure of hundreds of
thousands of accounts following AML reviews effectively undermines the global financial system by
reducing its ability to transfer funds across border and support international trade.

Possible solutions highlighted by PwC include increased use of data analytics, including automated entity
consolidation, alert risk scoring and new model-based approaches to transaction monitoring. These are
identified as ways to better manage risks and costs. But beyond pure technology, there is also a need for
greater coordination between front office relationship managers and compliance officers. Increased
collaboration within organisations can help financial institutions to become more selective in terms of their
correspondent banking relationships, says the report. This is critical to the risk-based approach that
regulators advocate.

In addition, collaboration between financial institutions was highlighted as a means to make


correspondent banking more viable, by making due diligence easier and streamlining compliance
processes. Examples include Swifts KYC Registry, which targets an area that is non-competitive but
which all financial institutions need to carry out essentially the same tasks.

Caution is also advised. For example, rules-based transaction monitoring can produce a high level of
false positives, so it may be better to adopt a system that incorporates more context provided by KYC or
customer-level information. Visualisation tools can provide a clearer view of detection scenarios, allowing
the number of false positives to be reduced.
Other factors that can be explored are factors related to underlying transactions such as structuring or
related to a group of transactions such as flows to or from high risk geographies. Investigation outcomes
can also be incorporated into model development, helping to create statistical models that can predict the
possibility that an alert will be escalated. The point is to prioritise, improving the efficiency of alerts and
investigation.

Together these techniques can create a smaller pool of alerts to investigate while still providing sufficient
coverage of the alerts that have the highest likelihood of being truly suspicious, read the report.