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September 2016 www.euromoney.com
Sibos 2016
special edition
Sibos Edition
Survey 2016: New networks
Keeping up with the
regional banks on change the face of
internet giants
the rise transaction banking
© 2016 Citigroup Inc. Citi, Citi and Arc Design and other marks used herein are service marks of Citigroup Inc. or its affiliates, used and registered throughout the world. Contents
September 2016
Sibos special edition
Every day, in cities around Chief executive: Andrew Rashbass
Directors: John Botts (Chairman), Andrew Rashbass (CEO),
the world, people are doing Sir Patrick Sergeant, The Viscount Rothermere, Colin Jones,
Martin Morgan, David Pritchard, Andrew Ballingal, Tristan Hillgarth
amazing things. They’re creating, 4 Cover story
Global risks rise as banks beat a retreat
innovating, adapting, building, Group publisher Neil Osborn
Managing director John Orchard For decades the world’s banks followed their multinational corporate customers across borders and built up international
networks to finance trade and serve surging capital flows. Now those cross-border flows of traded goods lag even weak
imagining. What about a bank? Editor Clive Horwood
global GDP growth and capital. The era of the global banks may have already ended with the financial crisis. Is the entire
Editorial director Peter Lee
Shouldn’t we be equally ingenious? Deputy editor Louise Bowman
Associate editor Mark Baker
concept of global banking at risk too? Peter Lee
Strive to match our clients’ vision, Private banking editor Helen Avery
EMEA editor Dominic O’Neill
Transaction services editor Kimberley Long
passion, innovation? At Citi, Latin America editor Rob Dwyer
14 Correspondent banking
Asia editor Chris Wright New networks change the face of transaction banking
we believe that banking should Emerging Europe editor Lucy Fitzgeorge-Parker
Chief correspondent Olivier Holmey
As the number of truly international banks shrinks, new alliances and networks are being
formed to meet the needs of clients. Choosing the right partners is important, but complex.
solve problems, grow companies, Contributors Ben Edwards, Eric Ellis, Philip Moore,
Sara Webb, Elliot Wilson And, increasingly, corporate treasury teams are taking a keen interest in the banks’ decisions.
build communities, change lives. Managing production editor Tom Crispin
Art director Rahul Singh
Kimberley Long
Chief sub-editor Paul Crowney
Sub-editor Julian Marshall
We’re glad to see you think so, too, Deputy publishers Soledad Contreras, William Powell,
Lily Zhu 18 Transaction services
and offer our sincere gratitude Associate publishers Angelique Bevan, Petra Callaly,
Melissa Roache
Keeping up with the internet giants
The internet has created a new kind of company that needs to be international and multi-
for helping Citi be named Senior manager Marcus Langston
Advertisement production manager Scott Newman currency from the outset. These are businesses that usually understand technology better than
Euromoney’s World’s Best Bank Head of events Rahel Demetri
Commercial director, events Daniel Elton
their banking partners. How are the world’s leading cash managers meeting the challenges
posed by these new clients? Kimberley Long
for Financial Institutions 2016. Online publisher Chris Hunt
Marketing director Carlos Doughty
Through our client relationships, Content manager Erica Jeffery
21 Cash management survey 2016
promotion of excellence, and Managing editor, data Tessa Wilkie
Technical analyst Ben Stevens
Regional banks on the rise
Researcher/database development Kalin Trifonov
commitment to driving growth, Associate, ECR Chilli Wutte While HSBC scores a notable double in Euromoney’s annual global rankings, the record
response rate of almost 35,000 validated votes generated a host of changes at the upper end
Citi remains committed to serving of our cash management survey, with regional banks to the fore and some previous global
leaders dropping back. Kimberley Long
the financial services industry. EUROMONEY CASH MANAGEMENT 2016 SURVEY RESULTS BEGIN ON PAGE 22
Your acknowledgment that Citi
has distinguished itself as being 28 Technology
your top choice for global banking Banks take over the blockchain
Everything you thought you knew about blockchain is wrong. Rather than wait for the it to
partner is sincerely appreciated. re-engineer banking, banks are going to re-engineer the blockchain. They are determined to
For subscriptions, contact our hotline: turn an existential threat into a competitive advantage. Peter Lee
THE
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WORLD’S
36 Technology
Artificial intelligence and the spectre of automation
Euromoney does not endorse any advertising material Forget about what you’ve seen in sci-fi movies. The deployment of narrow artificial intelligence
or editorials for third-party products included in this is of immediate relevance to the banking industry. A Euromoney Thought Leadership survey
publication. Care is taken to ensure that advertisers follow looks at how AI will change the structure of financial services. Tom Upchurch
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® the publisher cannot be held responsible for any errors.
WHEREVER
Our paper is produced by M-real to the following standards:
European Eco-management Audit Scheme (EMAS); the 42 Technology
Chain of Custody Programme for Endorsement of Forest Biometric banking and the $600 billion opportunity
Certification; and to ISO14001. An extraordinary revolution is taking place in digital banking in India. Driven by the state, it is
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YOU ARE.
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that needs it more than any other. Banks may face a binary outcome: be quick or be dead.
of Custody certification across all its sites. Chris Wright
citi.com/progress
www.euromoney.com Sibos 2016 3
SPONSORED CONTENT
EM FX MOST EXPOSED TO CARRY TRADE REVERSAL
Global investors are facing a conundrum; developed market bonds have never been pricier while central
bank policy has never been looser. Easy monetary conditions are driving gains in equities and supporting
bonds. But with the IIF noting recently that USD $10 tn worth of the world’s (i.e. developed market)
government securities are now offering negative rates, the search for yield is becoming more pronounced.
In the FX space, this has driven renewed interest in the carry trade. The main beneficiaries have been
higher-yielding EM currencies rather than the traditional G-10 high yielders and these currencies may be
the most exposed to a Fed-induced correction in the trade
By Shaun Osborne, Chief FX Strategist, Global Foreign Exchange, Scotiabank
Eric Theoret, Currency Strategist, Global Foreign Exchange, Scotiabank
T
he policy response to the
Great Financial Crisis
management techniques spill over
from equity investors. Common
investors, due to their positive (but
low single-digit) returns.
EM FX CARRY TRADES HAVE OUTPERFORMED THE G10
of 2008/9 has been thematic investment approaches to At least some of the FX market’s
characterized by aggressive currency speculation reflect value firepower has had to be concentrated
and extraordinary central bank investing (buying ‘cheap’ and selling on developing markets to generate
measures in a bid to boost growth, ‘rich’ currencies, according to some the positive carry returns seen this
curb deflation risks and stabilize metric), momentum strategies year. Bloomberg data show very
financial systems. As expected, (buying winners and selling losers) strong, net (currency appreciation and
returns on ‘safe’ assets have or, quite commonly in the early/mid interest earned) returns for investors
diminished and investors have been 2000s, carry trades (where investors going long Brazilian real and South
forced along the risk curve to obtain buy a higher yielding currency and African rand, for example, via a short
more satisfactory returns. fund that position by selling a lower US dollar position. Since the start of
The Institute of International yielding currency). Indices measuring this year, a buy-and-hold approach
Finance (IIF) recently noted the performance of these strategies using this strategy has produced a
that around $10 trillion-worth of allow us to observe changes in FX cumulative excess return of 25%,
government bonds (for example, investor behaviour in response to according to Bloomberg data.
“
Japanese, eurozone, Swiss, Danish the changing economic and market In contrast, a G10-centred carry
and Swedish debt) now offer negative landscape. The commodity trade has been a dud this trade strategy has delivered weaker
yields and no end appears to be in
sight. With interest rates in many
jurisdictions already at, or near,
record lows, a recent Bloomberg
Carry strategies proved popular
and were consistent money makers
for investors in the low-volatility
period leading up to the financial
year, however. Instead, FX investors are
making winning bets on carry trades again
after this strategy lost money in 2015 and
“ returns. A long AUD position funded
via an equally weighted basket of
USD, EUR and JPY is barely positive
on the year to date, for example.
Source: Macrobond, Scotiabank FX Strategy
report noted that “market implied crisis – until the downside of the Selling the SEK to fund a long NZD policymakers suggesting that policy will be tightened). carry trades especially. Currencies
rates in 20 of 33 countries tracked higher risk/higher reward trade- had a patchy start to 2016. does better, returning around 11% monetary policy may be tightened Scotiabank expects the Fed to that benefited most from attractive
by Bloomberg, representing 40% off became apparent. The more year to date, however. again in the coming months. tighten policy by 25 basis points yields so far this year – the Brazilian
of world GDP, show traders expect aggressive the reach for yield, the Carry trades thrive in the kind of IIF research* highlights the fact in December and implement three real, the Russian rouble, the Turkish
even lower borrowing costs in six more exposed investors become currencies whose terms of trade again after this strategy lost money in low-volatility environment we are that emerging markets are prone to additional ¼ point increases in 2017. lira and the South African rand, for
months”. The search for yield will only to a range of risks – market, credit, were deteriorating (Canadian and 2015 and had a patchy start to 2016. seeing now, particularly when yields weakness or crisis when the Fed is With market pricing barely reflecting example – may be most at risk of
become more desperate as low or liquidity. Sometimes, exposure to Australian dollar etc) and buying Investors are being forced to cast a of the funding and target currencies tightening policy. This is especially the risk of one 25bp tightening over correction.
negative nominal yields become more these risks occurs simultaneously, as commodity consumer currencies wider net to capture attractive yields, are diverging. However, experience the case when the policy tightening the next 12 months, a tightening of
entrenched in government, and even we saw in the Great Financial Crisis. whose terms of trade were conversely however, with nominal and real yields suggests that this strategy is prone is in its early stages or when market the scale we anticipate may well have
corporate, debt. Last year, the correction in improving (US dollar). The commodity in many developed markets near to sudden stops and significant participants are concerned that the repercussions for markets moving
Stylized investment strategies commodities prompted focus on trade has been a dud this year, zero or worse. Large, relatively liquid, reversals. This may be especially adjustment in monetary policy may into 2017 – volatility would likely
* Determinants of Emerging Market Crises:
have become more common among terms of trade-centric strategies however. Instead, FX investors are emerging bond markets are attracting relevant for emerging market-based be more significant (in terms of how increase, forcing investors to reduce The Role of U.S. Monetary Policy, Robin
currency traders as portfolio – selling commodity producer making winning bets on carry trades more interest from international carry trades with US Federal Reserve quickly or significantly monetary exposure to emerging markets and Koepke
Cover story
Global risks rise as
banks beat a retreat
For decades the world’s banks
followed their corporate customers
across borders and built international
networks to finance trade and serve
surging capital flows. Now those flows
of traded goods lag even weak global
GDP growth. Capital and lending
flows are shrinking too. Nationalism
is on the rise. The era of the global
banks may have already ended with
the financial crisis. Is the entire
concept of global banking at risk too?
By: Peter Lee
C
ould the de-risking of global banking, insisted upon so
vigorously both by regulators and shareholders since
the financial crisis, actually be making the world finan-
cial system more dangerous?
The IMF seems to be coming round to this view,
suggesting in a recent report that global banks ending correspondent
relationships with banks in emerging markets may be “potentially
undermining financial stability”.
That’s quite a grave charge in IMF-speak – and one that comes as
a surprise. As recently as 2015, the IMF posited that global banks’
retrenchment, and in particular their reduction in cross-border lending,
was making the global financial system safer. Its April 2015 Global
Financial Stability report argued that “the relative shift on the part of
foreign banks away from cross-border lending and toward more local
lending through affiliates has a positive effect on the financial stability
of host countries”.
Back then, the IMF appeared to cast international lending by global
banks as a source of systemic risk, saying: “Cross-border flows are
likely to contribute to the transmission of foreign shocks and may thus
increase volatility. For example, deleveraging by international banks
can reduce funding sources for banks in host countries. These banks in
turn may be forced to contract lending even in the absence of domestic
credit problems.”
Now, it says that the retreating global banks are draining the life-
blood from vulnerable countries – and not just smaller emerging coun-
tries but even larger economies such as Mexico and the Philippines.
In part, the IMF has shifted its emphasis. An excess of cross-border
lending, especially if poorly underwritten in expectation of ever-higher
commodity prices, may well be a bad thing. Providing links to the
4 Sibos 2016 www.euromoney.com www.euromoney.com Sibos 2016 5
Cover story
global payments infrastructure is a good One of the first things Stuart Gulliver did banking relationships with smaller lenders And no one wants that.
thing. But cutting provision of the first on becoming chief executive of HSBC in in many countries across all regions. Talk of undermining financial stability
leads almost inevitably to withdrawal of 2011 was to relegate the label of being the Banks have been told to cut back their sounds extreme. Yan Liu, assistant legal
the second. world’s local bank from a statement of its international operations by home regula- counsel at the IMF, concedes: “We have not
And how unstable the financial system strategy to a mere happy-clappy marketing tors that have ring-fenced both capital and observed macroeconomic consequences at
feels depends very much on whereabouts slogan. Running a far-flung network to in- liquidity and raised capital requirements the global level, but we have definitely seen
within it you happen to sit. tegrate financial flows is no longer HSBC’s against operational risk for banks deemed the impact on certain regions, for example
Banking supervisors in Europe and the job, especially not when it lands the bank highly complex and exposed to fines for the Caribbean”.
US, home to those developed market banks with big financial penalties for handling the sanctions breaches and anti-money launder- Liu uses the example of a company in
that once had aspirations to cover the accounts of Mexican drug dealers. Barbados trying to make a $100,000 pay-
globe, probably think it is much more sta- “The world is actually surprisingly US and UK banks lead reduction in ment for imported materials to a supplier
correspondent banking relationships
ble today. Their chief concern has been for concentrated,” Gulliver told shareholders in Belize. That payment is likely to be
Percent of local/regional banks reporting terminations
banks to increase capital, shrink balance on his first investor day as chief executive. denominated in US dollars, which requires
sheets, rein in the complexity of businesses “If you dig into trade flows, 35 countries 80 handling by a bank with access to the Fed-
that had pursued revenues into many more account for 90% of growth in trade flows eral Reserve system. Most domestic banks
markets than senior management teams over the next 10 years, and that also holds in the Caribbean do not have such access.
60
could ever hope to control or understand true for external debt, bank profit growth, In the past, they have been able to conduct
and so reduce the contingent liability of wallet available for bank profits and, “Why should we care about this problem? Because affected countries such payments for their customers with the
home-country taxpayers. indeed, FDI.” % 40 often are very vulnerable – they include small island economies and help of US correspondents. But US banks
Job certainly not complete – the banks He added: “We are not going to try to be countries in conflict. These are countries with minimal access to have been cutting those relationships for
may be more utility-like but they can’t seem all things to all people in all markets.” several years now. European banks are fast
financial services in the best of circumstances”
to make much money or attract inves- Hit by investigations into so-called 20 catching up with this process.
tors’ capital, while many in Europe are mirror trades in Russia last year, Deutsche Christine Lagarde, IMF Liu says that a survey of 16 leading
still burdened by legacy NPLs – but pretty Bank, to take another example, simply banks across five countries in the Carib-
0
much on track from a risk- and complexity- closed its markets business in Russia. It ing failures. It’s a bit thick if global policy- cross-border payments for their local cus- bean region shows that they have all lost
USA
UK
Switz
Can
Ger
Fra
Neth
SAfr
Eur
Aus
Swed
HK
reduction standpoint. reminded shareholders at the start of this Jurisdictions makers now blame banks for not leaving in tomers. As the retreat continues, however, some, or even all, of their correspondent
For those banks bailed out in the crisis, year that it would also retreat from 10 oth- Source: World Bank place just those parts of their international local lenders are running out of partners. relationships. In Belize, for example, just
the quid pro quo was always clear: concen- er so-called high-risk countries and would Global banks report CBRs withdrawal operations, the payments infrastructure, This risk of national or regional exclu- two out of nine banks still benefit from full
trate your resources closer to home. be off-boarding hundreds of thousands of Large banks (all regions): vostro accounts that policymakers now realize was actually sion from the global financial system owing banking relationships with global corre-
Developed market banks that once customers. quite useful, but with no other banking to the retreat of global banks from corre- spondent banks. Even the central bank is
No data
boasted of their global capabilities and For global banks, retrenching is the new business to pay for it. spondent banking is set to be a big topic at down to its last two such relationships.
scale have become keen instead to highlight expanding. It has been that way for some No change 10% In its simplest form, correspondent bank- the annual IMF/World Bank meetings. It’s not just trade finance payments that
both to regulators and shareholders that years now. 10% ing is the process by which a large, global In June, an IMF staff discussion note may be disrupted. Large companies head-
they are shedding customers and businesses Shortly after taking on the role of Increase
5% Decline bank in a developed market undertakes pulled together some data. It found that quartered in one Caribbean country typi-
in emerging markets to reduce both regular Deutsche Bank chief executive in 2015, to handle international payments for the fully 75% of surveyed global banks had cally need access to dollars to pay salary
annual operating expenses and the chance John Cryan said that in its signature global 75% customers of a smaller bank in an emerging been withdrawing from correspondent to employees based in another. Remittance
of extraordinary legal costs. markets business, it would exit half of its market. Christine Lagarde, managing direc- banking relationships, most prominently flows also are threatened. And these are
Citigroup was the preeminent bank of customer relationships. tor of the IMF, pointed out in a speech at the US, UK and Swiss banks, but also not just a nice-to-have. Liu says: “In some
the era of globalization led by US multi- Source: World Bank the New York Federal Reserve in July that: Canadian, German and French lenders. The countries, remittances account for a large
nationals. Its old leaders were overjoyed “Correspondent banking is like the blood overwhelming majority of national banking share of GDP… 10%, 20%, sometimes
Consequences of the withdrawal
when its list of country presences passed BUT THERE’S ALWAYS A DOWNSIDE. that delivers nutrients to different parts of authorities report reductions in dollar wire 40%. So you can see the impact.”
Percent of authorities reporting on impact
100. But more recently its new leaders If you are the corporate treasurer of a the body. It is core to the business of over transfers and remittances as a consequence.
International
have drawn attention to its retrenchment. medium-size business in Africa, the Carib- wire transfers 3,700 banking groups in 200 countries. The report’s authors judge that: “The
Clearing and
Chief executive Michael Corbat highlighted bean, in Central Asia, or in the Pacific settlement A global bank like Société Générale, for impact of the withdrawal of correspondent NO ONE SHOULD BLAME ANY
to Euromoney last year the halving of its region, the retreat of global banks may Cheque example, manages 1,700 correspondent banking relationships (CBRs) on certain global bank for re-examining its relation-
clearing
network of retail banks. look very different and quite alarmingly Trade
accounts and processes 3.3 million cor- jurisdictions can become systemic in nature ships with respondent banks far from
“It can be a tough decision in some unwelcome. It’s not just the reduction in finance respondent transactions every day.” if unaddressed.” its home base. The large banks are all
Cash management
countries that may have attractive demo- sources of credit that hurts companies, services In fact, the biggest banks have been turn- They also say that while the cutting of compelled to do this, just as they must re-
graphics but where you lack scale or where although refinancing risk is a big concern Investment ing away from correspondent banking for correspondent relationships is intended to evaluate the cost/income dynamics, capital
services
there are near-term political risks, but we for many leveraged corporations in emerg- FX some time. Local banks in smaller countries de-risk individual banks, at a system-wide consumption and returns of every single
services
have gone from 50 countries to a target of ing countries. Even more worrying is the Structured finance/
managed to find other providers in the first level, the process could “disrupt financial activity they engage in.
24,” Corbat told Euromoney. “And often it withdrawal of non-lending banking services foreign investments years of global banking’s great retreat after services and cross-border flows, including Capital requirements on systemically im-
is a straightforward decision.” and most especially payments. Caught up Lending the crisis, increasing their dependence on trade finance and remittances, potentially portant banks rise partly in lock-step with
0 50 100
Exiting countries has become the new in the de-risking of global banks has been a % fewer and fewer international partners, undermining financial stability, inclusion, their complexity and exposure to opera-
default mode. wholesale withdrawal from correspondent Source: World Bank but still remaining in the game of enabling growth and development goals”. tional risk, including liability for large fines.
6 Sibos 2016 www.euromoney.com www.euromoney.com Sibos 2016 7
Cover story
“In other jurisdictions, efforts may need tors and policymakers to be careful what in developed markets where issuance of, and the end of 2014, McKinsey finds.
to go beyond improving compliance, how- they wish for. and trading in, synthetic derivatives with Cross-border equity flows are essentially
ever,” Lagarde admitted in her July speech. But it’s largely irrelevant because there synthetic counterparties became the norm, flat in value but have declined relative to
“Business models that depend on opaque- are bigger forces at work here. accepted and even encouraged by greedy global GDP.
ness, offshore structures and a lack of investors and sovereign tax authorities and Data for 2015 show that global financial
transparency clearly need to be reassessed.” nodded through by supine regulators. flows declined further across a broad range
If certain banks and even whole coun- ARE WE WITNESSING THE END OF McKinsey is in no doubt why this col- of developing countries. The most recent
tries find themselves at risk of exclusion in the era of globalization that has de- lapse in cross-border flows has happened. BIS quarterly lending report published in
the meantime, surely that is a call to action. fined most of our lifetimes? In February, “Facing new regulations on capital and June covers data up to the end of 2015. The
“Why should we care about this prob- McKinsey published a landmark study liquidity, as well as pressures from share- BIS reports that cross-border lending in
lem?” Lagarde asked. “Because affected on how cross-border data flow is increas- holders and regulators to reduce risk, many 2015 shrank by 3%, continuing the sharp
countries often are very vulnerable – they ingly important to the global economy. banks in advanced economies are winnow- retrenchment from a 20-year average posi-
include small island economies and coun- These digital data flows seem, in so far not ing down the geographies and business tive growth rate of 6%. It noted that the
tries in conflict. These are countries with well-understood or much-studied ways, to lines in which they operate.” The consul- decline in the fourth quarter of 2015 was
minimal access to financial services in the be picking up the baton from the now- tancy firm points out that from early 2007 evenly spread, but highlighted some new
best of circumstances.” floundering drivers of the global economy through the end of 2012, commercial banks signals.
Lagarde highlighted the impact on in the late 20th century and the first decade sold off more than $722 billion in assets Interbank lending has seen the greatest
smaller countries such as Liberia, where of this: namely the cross-border flows of and operations, with foreign operations ac- fall in the era of declining cross-border
global banks have terminated almost half capital in bond and equity purchases, in counting for almost half of that total. flows. In Europe for example, the ECB has
of the existing 75 correspondent relations, foreign direct investment and in interna- This retrenchment has not simply seen effectively replaced the interbank lending
severely affecting the ability of local banks tional bank lending often linked to trade in developed-market banks shunning emerging market. Now, the BIS reports that in the
to conduct US dollar transactions, and manufactured goods and commodities. markets. In the first years of recovery after most recent quarter for which data have
Samoa, where remittances account for 20% McKinsey points out that cross-border the financial crisis and subsequent reces- been compiled “interbank activity again
“It can be a tough decision in some countries that may have attractive
of GDP and banks have been terminating capital flows have fallen sharply since 2008 sion, flows into emerging markets actually accounted for the largest share and mainly
demographics but where you lack scale or where there are near-term accounts of Samoa-linked money transfer and show no sign of recovery. For 25 years picked up as these appeared to offer growth drove the overall decline. But claims on
political risks, but we have gone from 50 countries to a target of 24. And agents. before the 2008 financial crisis, these flows amid a developed-market downturn. As non-bank borrowers, which had previously
often it is a straightforward decision” The impact is being felt on larger grew faster than global GDP, rising from they de-levered in the first five years after held up better, also fell substantially (by
countries as well: not just Mexico but also $0.5 trillion in 1980 to $11.9 trillion in the financial crisis, eurozone banks cut $177 billion)”.
Michael Corbat, Citi the Philippines, and other economies that 2007. cross-border lending by $3.7 trillion, but It also noted a new trend: the appearance
rely heavily on cross-border flows such as Since that peak, financial flows dropped loans and claims on other European coun- of certain emerging market banks, notably
It is no surprise they have been getting out the crisis: back towards their home markets remittances, and where development is now from the equivalent of 21% of global GDP tries accounted for three quarters of that Chinese lenders, as an increasingly impor-
of businesses and of countries where the and core functions. at risk. in 2007 to just 7% in 2014. Much of the decline or fully $2.8 trillion. tant source of international bank credit. At
potential revenues don’t match up to the The ending of so many correspondent- “And even if the global implications of decline is evident in cross-border lending. Beyond the retrenchment in cross-border the end of December 2015, they were the
costs, including swollen annual compliance banking relationships is evidence that the these disruptions are not visible so far,” La- Partly it is a direct consequence of delev- lending, international investment flows in 10th largest creditors in the international
expenses and the risk of billion-dollar fines clean-up of global banking is working. Yes, garde warned, “they can become systemic if eraging by a ludicrously swollen financial bonds, equities and FDI are also flat or banking system, according to the BIS, with
for breaches of anti-money laundering and exclusion is a bad consequence for some left unaddressed.” system and a welcome retreat from the ex- down. Cross-border bond and FDI flows cross-border assets of $722 billion. Chinese
know-your-customer regulations. smaller economies. But need it be perma- Lagarde did not specify what systemic cessive financialization of developing econ- have declined 41% and 35%, respectively, banks are an especially important source of
What is rational for each bank may be nent? risks she means, leaving listeners to hear omies. This briefly threatened to mimic that in absolute terms between the end of 2007 US dollar credit: their cross-border dollar
bad for the system as a whole. Developed-market regulators may point confirmation of their own fears: rising assets totalled $529 billion, larger than
Liu observes: “Simultaneous actions by out that if those countries did a better job defaults and bad debts, perhaps failed Flows of goods, services, and finance have declined relative to GDP those of banks in all but five countries,
many banks to cut off these relationships of excluding tax evaders, criminals and ter- states and heightened geopolitical risk and 1980 to 2014 namely the US, UK, Japan, the Cayman
could leave certain countries or regions at rorists from their domestic banking systems regional insecurity. 55 Islands and Hong Kong.
the brink of losing access to the interna- then access might be restored. Mexico is Expect at the annual IMF meetings to Finance 50
Despite the emergence of large local
tional system.” a revealing example. The authorities there hear developed-market regulators covering Services
–14pp emerging market and regional banks to
45
It may be too late to harp on about the have issued new regulations to increase their backsides and claiming that they never take up some of the slack from global
All flows as % of GDP
Goods
downside of de-risking the global banks so anti-money laundering and combating the intended the banks under their charge to 40 banks, it seems unlikely there will be any
soon after the enforcement actions of 2014, finance-of-terrorism controls, including a terminate correspondent banking relation- 35 revival of cross-border lending this year. In-
when BNP Paribas forfeited $8.9 billion requirement for legal entity identifiers for ships or exit countries on such a scale 30
30
deed analysts are now looking for hopeful
25
$ tln, nominal
over sanctions busting, JPMorgan paid banks and large firms involved in certain and in such knee-jerk fashion in response signs amid the wreckage of global banking
20 25
out $2.4 billion over anti-money launder- high-risk transactions. These steps were to a mere handful of multi-billion dollar in this decline in cross-border exposure.
15 20
ing failures related to Bernie Madoff, and taken in coordination with the home au- pay-outs extracted from the worst repeat In August, BNP Paribas once again tried
10
Credit Suisse paid $2.6 billion for helping thorities of global banks, both to reduce the offenders. 5
to figure out the systemic consequences
US individuals evade taxes. risk of disruption in correspondent banking That’s self-serving piffle at best, admis- of a Fed rate hike later this year, thinking
1980 1990 2000 2007 2014
Regulators and policymakers have been and bolster the domestic regulatory frame- sion of a fundamental misunderstanding of of developed-market bank and investor
pushing banks in one direction only since work at the same time. banks at worst and a reminder for regula- Source: McKinsey exposure to over-valued emerging market
8 Sibos 2016 www.euromoney.com www.euromoney.com Sibos 2016 9
Cover story
decline in cross-border bank lending
reduces global systemic risks resulting
Could digital technology offer hope for a new era of financial interconnectivity? from US policy adjustments,” says Wike
Global banks are in retreat. Some tion has not stopped, as might a decade after starting, as familiar benefits fell to countries that were Groenenberg, analyst at BNP Paribas.
countries stand on the brink of seem the case from the slowing to Chinese language shoppers the central hubs in flows of physi- If the slowing growth in many of
exclusion from the conventional of trade and the retreat to home as eBay. cal goods and of finance. In the those large Asian emerging markets
financial system. Cross-border markets of once globalizing “Consider all of the tools and era of digital globalization, more continues into outright recession,
capital and lending flows are de- enterprises like the world’s largest platforms that a small Chinese of the benefit passes to countries presumably only a churl would ask if
clining, albeit from previously un- banks. Rather, small businesses manufacturer has at its dis- even at the fringe of such flows, slowing cross-border lending might be
sustainable and dangerous highs. and individuals are becoming the posal when it becomes a Taobao as long as they participate at all. the cause of that faltering growth rather
Trade is lagging even anaemic drivers of globalization. merchant,” the report asks. “The McKinsey argues: “The near- than its consequence.
global expansion. Protectionism It points out that small busi- company can open and custom- zero marginal costs of digital The BIS advises that any analysis of
and nationalism are the rising nesses worldwide are becoming ize a Taobao ‘storefront’ for free communications and transactions the vulnerability of emerging market
political forces. “micro-multinationals” by using using a mobile app and upload open new possibilities for con- economies to further disruption in
And yet away from war zones digital platforms such as eBay, its merchandise for sale. It can ducting business across borders cross-border capital flows ought to start
and populations suffering from Amazon, Facebook and Alibaba communicate with customers us- on a massive scale.” by recognizing the substantial growth in
the worst extremes of poverty, to connect with customers and ing an instant messaging service, And what of the retreating aggregate indebtedness of corporations,
the digital economy makes most suppliers in other countries. Even handle payments through Alipay, banks? Business, experience on credit drawn from both domestic as
of us feel more inter-connected the smallest enterprises can be choose an Alibaba-affiliated suggests, just like nature, abhors well as international sources.
than ever before. born global: 86% of tech-based logistics company for shipping, a vacuum. As McKinsey points This is already ringing alarm bells.
Is it to be our redemption? start-ups McKinsey surveyed place targeted digital ad buys out for the small merchants on Slowing cross-border flows may not
A McKinsey report, Digital report some type of cross-border through Alimama, and get a small Taobao, if they need finance, be a sign of stability at all. According to The candidacy of of financing in the run-up to crises. “In- IT IS SOMEWHAT IRONIC, GIVEN
Donald Trump is
globalization: new era of global activity. loan instantly from an Alibaba some business will provide it, the BIS’s debt statistics, corporate debt part of a populist, ternational capital outflows could affect the IMF’s concern about the termination
flows, attempts to measure the Once dominated by multina- microfinance subsidiary that can whether the lending arm of their in the big emerging market economies nationalist trend overall investor sentiment and credit of correspondent banking relationships,
that could even
growth of cross-border flows in tional corporates funded by the evaluate the merchant’s credit digital shop-front host, an un- increased on aggregate from less than threaten global conditions, either by leading directly that the only cross-border financial
data, which it estimates have in- largest banks, globalization is based on data about its business regulated lender or a recognized 60% of GDP in 2006 to 110% at end- trade flows to defaults or by steering corporates to flows that have continued to grow since
creased 45 times in the 10 years increasingly the preserve of indi- performance on the platform. bank perhaps backing the line of 2015, much of it raised in bond mar- seek funding from the already stretched the global financial crisis and ensuing
from 2005, even as trade and viduals participating in it directly, “Finally, the company can use credit to a peer-to-peer lending kets. The BIS warns: “Given the steep domestic markets and banks”. recession are remittances. These were up
financial flows have flattened. using digital platforms to learn, Alibaba itself to buy supplies and platform. repayment schedule that lies ahead, the In a global economy characterized 7% annually over the five years to the
McKinsey contends that find work, showcase their talent professional services.” Similarly, if conventional banks refinancing capacity of highly leveraged by an absence of demand, most central start of 2016 and are now worth $583
the cross-border bandwidth of and build networks. Some 900 In 2010, The World Bank will not service the world’s largest emerging market companies is likely to banks are striving to weaken their billion annually. Of course, the growth in
data flows will grow by another million people have international estimated there were around remittance corridors, new start- be tested soon, especially if the rise of currencies to revive trade while also remittances reflects the increasing flows
nine times in the next five years connections on social media and 125 million small and medium- ups with better technology will. the US dollar continues.” holding down the servicing cost for vast of migrants, against which there is now
as digital flows of commerce, 360 million take part in cross- sized enterprises in the world. By Euromoney has written about The BIS points out that while corpo- government and private-sector debt a growing populist political backlash in
information, searches, video, border e-commerce. 2013 some 25 million of these TransferWise, Azimo and others. rates’ international debts are smaller stocks they have no hope of repaying by Europe, most evident in the UK vote to
communication and intra-com- Approximately 12% of the were active on Facebook. Today New digital banks like Safello and than their domestic debts, international any conventional meaning of that term, leave the EU, and in the rallies supporting
pany traffic continue to surge. global goods trade is now Facebook reports 50 million SME Wirex will use blockchain to ease flows are regularly the marginal source or of inflating them away. Donald Trump’s campaign for the presi-
It suggests that data flows are conducted via international users. In the US, the share of the flow of low-value, cross-bor-
already contributing more to GDP e-commerce, with much of it exports by large multinational der payments at high speed and
The biggest platforms have user bases
growth than cross-border flows driven by open platforms such as corporations dropped from 84% low cost for individuals and small Stockpile of trade-restrictive measures
on par with the populations of the world’s
of manufactured goods, and that Alibaba, Amazon, eBay, Flipkart in 1977 to 50% in 2013. Among businesses. Corporations will biggest countries
2010-2016
data flows account for $2.8 trillion and Rakuten. SMEs that export, the small- look to fintech companies for new Million
Facebook 1,590 By mid-October 2010 By mid-May 2016
out of the total of $7.8 trillion of McKinsey runs through the est – those with fewer than 50 payment services if the estab-
global GDP contributed by the example of Taobao, the Chinese employees – are gaining share lished banks won’t help them.
China 1,372
India 1,314 57
combined cross-border flows of consumer-to-consumer mar- the fastest, McKinsey finds. And if banks can’t adapt to the YouTube 1,000 Effectively
traded goods, FDI and data in ketplace that Alibaba set up in In the past era of globalization new digital world, then so be it. WhatsApp 1,000 387 eliminated
measures
2014. 2003 that grew to be one of the led by developed-market multi- They are simply self-selecting for WeChat 650 324
McKinsey posits that globaliza- world’s top-10 visited sites within national corporations most of the extinction.
Alibaba 407
Instagram 400 Stockpile of
restrictive
US 321 381 measures measures
Twitter 320 1,196
financial assets and mal-investment driven first quarter of 2016, BNP Paribas noted a Cross-border lending to China, extended Skype 300
Amazon 300
by low and even negative yields in devel- 28% year-on-year decline in cross-border mainly by developed-market banks, had
Indonesia 256 Online platforms
oped markets. claims on China; a 23% decline in claims surged to $1.1 trillion in mid-2014. It was
Brazil 205 Countries 1,583 measures
Assessing cross-border claims on the on Russia; a 16% decline in claims on down to just under $700 billion at the start
Source: McKinsey Source: WTO Secretariat
larger emerging countries at the end of the Brazil and a 7% decline on claims in India. of the second quarter of this year. “This
10 Sibos 2016 www.euromoney.com www.euromoney.com Sibos 2016 11
Cover story SPONSORED CONTENT
THE DIGITAL
dency of the US. At the same time as saying
they will erect real or metaphoric barriers to
chilling effect on trade flows, with knock-on
effects for economic growth and job creation.
After a sharp decline following the finan-
cial crisis and a short-lived rebound after the
TRANSFORMATION:
NEW CORPORATE FAD OR
immigration, politicians riding the surging “We hope that this will not be an indica- ensuing recession, however, the goods trade
wave of new nationalism are also increasingly tion of things to come, and clearly action has been growing more slowly even than
hostile to free trade. is needed,” he says. “Out of the more than lacklustre world GDP in recent years, puz-
Stephen Gallagher, an economist at Société
Générale, looking ahead to the economic
impact of the US presidential election, notes:
2,800 trade-restrictive measures recorded by
this exercise since October 2008, only 25%
have been removed.”
zling economists and business leaders alike.
In July, after the UK population voted to
leave the EU, the IMF refined its forecasts for
TIDAL WAVE OF CHANGE?
“Both candidates have criticized the Trans- This adds further uncertainty to the global GDP growth this year and next. It now
Pacific Partnership (TPP). Their positions outlook for trade. The WTO pleads with the forecasts global growth of 3.1% in 2016 and Sophie Michel (SM) and Steven Lenaerts
reflect voter sentiment. Clinton is more leading G20 economies to set an example in 3.4% in 2017. In April, the WTO forecast (SL) reveal their views on the digital
likely to maintain the current trade status the fight against protectionism by rejecting global trade to grow at below this rate, at just transformation and the impact it is having on
quo, whereas Trump promises to re-open new trade-restrictive measures and rolling 2.8% in 2016, the same rate at which it grew cash management processes, as well as on
discussions on the North America Free Trade back exiting ones. Even with Trump trailing in 2015. Instead of exceeding and leading financial strategies more broadly.
Agreement (Nafta).” in the autumn polls, let’s hope no one at the GDP growth, which was 3.1% for 2015,
R
Gallagher admits that: “Precisely what WTO is holding their breath on that. trade continues to lag.
he wants to renegotiate is unclear – Canada McKinsey points out that for two decades According to McKinsey: “Some of this evolution or digital Speed, efficiency ... is the digital era the SM: I should add that while online, tutorials, and also knowledge-
and Mexico are not eager to negotiate, and in the run-up to the financial crisis, the decline is cyclical. Our analysis suggests that transformation: where do you panacea of cash management? digitisation means greater simplicity, sharing tools.
changes from a Trump administration could world’s trade in goods, including commodi- weak demand and plummeting prices for sit on this question? SM: Not on its own, as other factors it also lets us reinvent the customer
be unilateral.” ties, finished goods and intermediate inputs, commodities account for nearly three-quar- SM: Cash management is the of course have an influence. The experience; it can make it more intuitive So can nothing stop the digital wave?
He also notes Trump’s talk of throwing up grew roughly twice as fast as global GDP, as ters of the decline in trade.” foremost of the bank’s transactional globalisation of the economy is and add more subjective dimensions, SL: Certainly, the increasing number
punitive tariffs, which tends to go down well multinationals expanded their supply chains But trade in both finished and intermediate métiers, and digital in nature. What affecting businesses of all sizes, which taking it beyond being simply of compliance-related requirements,
we call “the new communication are subject to an increasingly complex satisfactory. as well as the growing prevalence of
at rallies, and says: “These signals on trade and established new bases of production in manufactured goods has also declined. The
technologies” have given us both the regulatory environment. internet fraud demand extra care and
could reduce potential US GDP over a long countries with low-cost labour. makers of many finished goods are beginning
ability to integrate interactivity into But there is a dichotomy: the Doesn’t the digital transformation allow greater expertise. In the long run though,
time period.” Global trade in goods soared from 13.8% to place less importance on labour costs and
our transactional processes, and the benefits of digitalisation are very real precisely that, to put the customer back the advantages of digitalisation will far
In a survey published in June of trade of world GDP in 1986 to 26.6% in 2008 on more on speed to market, McKinsey argues.
opportunity to widen channels of the environment in which companies at the heart of the various processes? outweigh the investment needed.
measures implemented between mid-October the eve of the financial crisis. This was the As a result, some production is moving closer
communication. For example, mobile are developing requires them to SM: Absolutely. This looks much SM: As a bank, we have a dual
2015 and mid-May 2016, the WTO reports heyday of globalization, when global elites to end-consumers. Trade is also declining for
technology means we can offer implement tighter internal and security- more like a fundamental shift than a role: on one hand, we need to support
a marked rise in protectionism, with 145 largely embraced the so-called Washington many intermediate goods such as chemicals,
signatories more flexibility in the related controls. temporary trend. So our customers are digitalisation of the core processes
new trade-restrictive measures introduced in consensus lionizing unfettered free mar- paper, textile fabrics, and communications
validation of their transactions. SL: Treasurers need to produce also shifting their paradigm, resulting to ensure our customers’ transactions
that period, and these are now coming at the kets, free movement of capital and goods and electrical equipment. This suggests that
reliable and consolidated data, and their in this new customer experience. This are processed in complete safety and
fastest monthly rate since the WTO began everywhere, whatever the consequences for global value chains may be shortening, at
What does digital technology bring to reports must be up-to-the-minute, even means they expect the same proactive compliance. On the other hand, our role
surveying such measures in 2009. populations. They hoped that voters’ fear of least in part because of the cost of managing
cash management today? though requirements vary between approach from their bank. The digital is to use our services and expertise, via
“In the current environment, a rise in falling wages and rising unemployment might complex, lengthy supply chains.
SM: Exchanges relating to payments, countries. The treasurer must meet transformation has been underway at a new kind of customer experience, to
trade restrictions is the last thing the global be bought off with cheap imported TVs and, There is also an argument that organized
collections and reporting processes are objectives whilst being a pivotal aspect BNP Paribas cash management for a help companies face the challenges of a
economy needs,” says Roberto Azevêdo, of course, low-rate financing to speculate on labour in developed markets has been bat- already dematerialised in the main. We of the company’s development. very long time. world of great and rapid change.
director general of the WTO, drawing the housing and financial assets to compensate tered into submission. Even in countries such carry out our transactional activity in a
traditional link between trade and economic for declining regular earnings from tradi- as the US, seemingly at the point of full em- heavily digitalised environment, and this Exactly: can digital working offset this Where will this take you?
growth. “This increase could have a further tional sources like… actual jobs. ployment, hourly wages are not rising. Does leads to greater efficiency and reliability. increased complexity? SM: Today, our ambition is to continue Our Atlas and Currency Guide tools,
this reflect lack of investment in productivity- as well as our sites dedicated to cash
But in addition, the latest aspects of SL: Digitalisation must take place within to support the change at operational
Cross-border bandwidth has grown 45 times larger over the past decade management and trade solutions, can
enhancing technology, or perhaps workers digitalisation are also allowing us to move accepted practices. This requires both level by dematerialising the key
Terabits/second be found online:
in developed economies accepting they into management processes associated. command of the technology, which is a processes, while also making a stronger
Actual Forecast must compete with hourly rates in emerging SL: eBAM (Electronic Bank Account prerequisite (such as for XML formats), contribution to the development of currencyguide.bnpparibas.com/
>9x markets? “In the decade ahead, the global Management) is a good illustration of but also extensive knowledge of the businesses. Digital technology can and
1,914 goods trade may continue to decline relative this. Account administration is among regulatory requirements of each must continue to improve efficiency, cashmanagement.bnpparibas.com/
atlas-countries
to world GDP,” McKinsey suggests. the priorities for companies with a country. and convey our advice and expertise to
1,397 That’s not good news for banks that have foothold in several countries. The first Digital transformation must be customers. www.youtube.com/
depended on a rise in globalization for much product we developed was aimed at taken forward by all those operating in SL: We are already committed to this watch?v=uRqLxmTK5qM
1,020
of their growth for a generation or more. these types of companies. It gives them the cash management environment. If form of action by designing new digital
744 www.cashmanagement.bnpparibas.com
45x Structurally lower trade means less need for the advantage of a real-time overview this happens, the many challenges of tools that will assist us in our advisory
543
397 cross-border payments, cash management, of who is able to do what in relation to the digital era can be met and its full function: among others, we could cite www.tradesolutions.bnpparibas.com
290
147 211
11 19 30 46 70 101
foreign exchange, cross-border investment all of their accounts. potential exploited in the long run. the financial information now published
5 7
2005 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 2021 flows and inter-regional M&A. How banks
Estimated react to these challenges will define the indus-
Source: McKinsey try for the next generation.
12 Sibos 2016 www.euromoney.com
Correspondent banking
New
networks process. On top of the standard KYC and
anti-money laundering (AML) requirements,
change there has to be an assessment of the bank
itself. What is its culture and can the teams
the face of work well together? What are their stand-
ards on customer service, and do they match
transaction the bank’s own?
Magnus McNeill, head of banks and bro-
banking
ker dealers at SEB, says: “Working through
regulatory constraints, competitive aspects
and confidentiality concerns is a complex
exercise when determining which banks
As the number of truly are most suitable as partners. It needs to be
international banks a bank with a similar culture. Is their ap-
proach towards customers the same as ours?
shrinks, new alliances Do they deal with customers personally, or
and networks are refer them to a call centre? We’d rather not
provide a service than provide it badly.”
being formed to meet George Koutzen, head of business risk
and control management, global liquidity
the needs of clients. and cash management at HSBC, notes it is
Choosing the right an important business decision; the bank
must trust the correspondent to work to its
partner is an important own exacting standards.
and complex process. “It is not a casual relationship when you
engage with another bank, it needs to be
Increasingly, corporate strong as the partner will engage with your
treasury teams are clients,” he says. “There needs to be proper
due diligence and an understanding of
taking a keen interest in operations. Through taking a disciplined ap-
proach, it is also how they can learn about
the banks’ decisions how we operate.”
By: Kimberley Long When a corporate signs an agreement
A
with its primary cash management bank, re-
sk almost any bank about gardless of the method in which transactions
their international ambi- are completed, it is up to the bank to ensure
tions in recent years and it is delivering on the promised standard.
you would get the same “Clients understand the need to use part-
response: We’re not look- did not. Costs rose and profits fell. Stricter ing to a close. the correspondent banking network at its certain regions or markets. Institutions that ners and we are always up front about this.
ing to expand for expansion’s sake, but we know-your-client (KYC) requirements Anurag Bajaj, global head of correspond- core. have tried to operate across multiple regions But ultimately it is still HSBC’s responsibility
will go with our clients where they want us turned the conversation away from global ent banking at Standard Chartered, says: “The period of global expansion is behind or segments have for the most part been to deliver,” says Koutzen.
to go with them. banks being too big to fail, to simply being “The number of truly global banks has us,” says Glyptis. “While there is now unsuccessful.” Dub Newman, managing director, head
But is that still really the case? Pressured too big to manage. declined as more and more institutions stability, there is limited scope for additional But can alliances really fill the gaps and of North America GTS, Bank of America
by costs, falling revenues and regulation, Leda Glyptis, a director at consultants focus on their core markets to follow their growth. After a short period of concern and offer clients a seamless service? Will clients Merrill Lynch, says the bank ensures the
many banks are starting to ask the question: Sapient, says: “Historically there have been strategy. In the recent past, many banks activity over what impact the cryptocurren- find particular products or offerings falling client receives the same consistent, high level
If we expand our geographic footprint to two assumptions with a bank’s international pursued opportunistic growth to expand cies could have on correspondent banking, it through the cracks? Or could it be possible of service, whether it comes from BAML
support our clients, are we going to generate presence: that global is good and that it beyond their home markets, only to find out has quietened down again.” that an alliance of specialists actually gives or their partner: “We employ an integrated
enough revenue to make the costs and the does not have to be deep. Neither of these is that this strategy was not sustainable in the Banks are becoming more specialized in clients a better overall service? partner bank model, which we believe is
risks worthwhile? necessarily true.” long-term. their services, targeting key client segments the best way to serve our clients. No matter
Then there are the challenges facing the Whether it is RBS deciding to sell its “An eastern Europe bank, for example, and product sets. Dominic Broom, head of where in the world they conduct business,
few banks left with truly global ambitions. transaction banking business outside the chasing opportunities in Asia will suddenly treasury services EMEA at Bank of New THE IMPORTANCE OF HAVING A our clients can then receive a consistent ex-
Once, they took pride in having a presence UK, HSBC selling its Brazilian business to find that the cost of doing business in terms York Mellon, says: “Correspondent banking strong counterparty network has grown, but perience – they’ll receive the same standard
in as many countries as possible. Global Banco Bradesco, or ANZ pulling back from of regulation and operations outstrips the has moved towards selective specialism; comes with its own problems to navigate. of service, the same contract documentation
expansion seemed a goal in itself – the prof- its ambitions in Asia, the era of global or opportunity.” leveraging non-compete local-global bank Each bank has to decide which other banks and access to our integrated technology.”
its would surely follow. But, generally, they even regional expansion seems to be draw- Instead, a new approach is emerging, with alliances that bring together experts in it wants to work with. It is a detailed McNeill adds that clients will notice if
14 Sibos 2016 www.euromoney.com www.euromoney.com Sibos 2016 15
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