Ninety-four relationships: correspondent banking as infrastructure

At the end of June the firm held 94 correspondent and counterparty relationships across 38 countries, up from 61 two years ago. The number grows because the firm operates in more places, not because more relationships are better. Each one is an asset with an acquisition cost and a maintenance cost. Onboarding a new correspondent takes between four and seven months and requires ownership documents, the compliance framework of the group, sanctions and financial crime policies, and answers to a questionnaire that runs past two hundred items. The maintenance cost is a review pack every year and roughly 22 ad hoc information requests across the network annually.

The reason to hold this many is corridor redundancy. A payment corridor served by one correspondent is a single point of failure for every client and every entity that uses it. Our standard is two live routes for each of the fourteen currencies the firm settles in, with the second route tested by a live payment every quarter rather than held in reserve on paper. A dormant relationship is not a relationship. It is a name in a file that will require a fresh review before it can carry anything, and the review takes longer than the outage that made it necessary.

Withdrawal risk is real and it is rarely about the client. Institutions exit jurisdictions and client categories for reasons of their own portfolio strategy, and the notice period is typically 90 days. The firm has received three such notices since 2021, two of them affecting Caribbean corridors. In each case the second route absorbed the volume within a week, because it had been tested. Institutions without a tested alternative spend that 90-day period onboarding under time pressure, which is the worst condition in which to negotiate terms and the most likely to produce an unsuitable counterparty.

What a correspondent asks for has changed in a way that favours institutions with documented processes. Requests now focus on the ultimate source of funds in the underlying relationships, the screening technology in use and its false positive handling, and the governance around any automated decision in the payment chain. The firm answers the last of these by reference to the Ethical Technology Charter: screening tools rank alerts, and a named person clears every one. That answer has shortened two onboardings materially, because the reviewer did not have to satisfy themselves about an automated process that does not exist here.

Concentration inside the network is measured like any other exposure. No single correspondent holds more than 18 per cent of settlement volume, and no single correspondent is the sole route for a currency. Balances held with correspondents are subject to the same counterparty limits as any other credit exposure, reviewed by the Risk and Valuation Committee, and swept to the operating minimum daily. The failure of a correspondent is a credit event and an operational event at the same time, and it is the combination that hurts.

This infrastructure is unglamorous and it is a condition of everything else the firm does. A trade facility in Panama, a fee from an advisory mandate in Singapore and a distribution to a family in Nassau all move through it. The Commercial Finance division treats the network as a product with a stated service level rather than as a treasury function, and the relationships are reviewed on a schedule by people whose names appear against them. Expansion adds corridors before it adds offices, because an office without a settled payment route cannot do business on the day it opens.

Published 2023-09-19 by the Commercial Finance division. Research is prepared for eligible counterparties and does not constitute advice.