Corporate Finance In Retreat

With enforcement actions raining down on them—and large fines to boot—the world’s largest banks seem to be getting regulators’ message on compliance. To adapt to today’s more rigorous regulatory environment, which authorities in the United States and Europe put in place in response to the global financial crisis of 2008 and to combat money laundering and terrorist financing, banks have reduced their leverage and risk tolerance. The actions of the banks may make the global financial system less of a “casino” than it once was, but are banks taking things to the opposite extreme, to the detriment of corporate treasuries and correspondent banks, particularly in emerging markets?

“The costly settlements they entered into with regulators have convinced at least some of the banks to avoid the risk of compliance altogether,” says Jodi Avergun, a partner at Washington, DC–based law firm Cadwalader Wickersham & Taft. “Many correspondent banks or accounts that are ‘red-flagged,’ which in the past would have led to an investigation and due diligence, are now just cut off or closed down.” Driven by the desire not to run afoul of stricter anti-money-laundering requirements, large global banking brand names—the likes of an HSBC, Standard Chartered or Citigroup—have reportedly slashed services or discontinued correspondent banking relationships. Are they simply embracing a proactive risk-assessment strategy, as regulators want them to? Or are banks drawing an arbitrary line under entire countries and regions, regardless of the actual risk profile of individual accounts?

The answer remains controversial and the evidence, anecdotal. Banks are generally uncomfortable discussing the topic of de-risking, and those contacted for this piece declined to comment. Hard data is spotty at best, but the World Bank and the Center for Global Development (CGD), which works to reduce global poverty and inequality, separately released studies at the end of 2015 that point toward an emerging trend. The World Bank surveyed dozens of banking authorities, local banks and large international banks around the world. It found that approximately half of the banking authorities and local banks, and 75% of the largest institutions, had noticed a decline in correspondent banking relationships between 2012 and 2015.

The report also found that the Caribbean was the region most affected and that US-headquartered banks were the most keen to retreat. Finally, respondents indicated that services like check clearing, clearing and settlement, cash management, international wire transfers and trade finance were the most likely to be affected. Quoting several previous surveys, the CGD report further confirms the growing sense among industry professionals that a substantial number of links between banks have been severed in recent years.

The full impact of this phenomenon may take a while to make itself felt, but corporate leaders are beginning to get wind of it, says Carlos Landa, CEO of Apoint Mexico, a business-process-outsourcing company whose range of operations extends to seven other countries across Central America. “We have been growing and need loans to finance this expansion. We also need short-term loans to cover our cash flow needs, but we don’t ask the big banks because they have become very rigid, and the process, very burdensome and slow.”

If Latin America is in the eye of the storm, treasurers in other regions are also getting an inkling of what may lie ahead. “Most recently, in a discussion with a local correspondent bank on foreign exchange hedging, it was brought to our attention that we would not be able to trade with that bank unless an EMIR was signed,” says Cindy Sieberts, group treasurer at gold-mining firm Gold Fields in South Africa. EMIR stands for the new European Market Infrastructure Regulation, which requires that all derivative transactions by banks and corporates alike with a European Union entity be reported to a central trade repository. “There has been a slight shift, perhaps not in the breadth of services that banks provide, but that a lot more supportive documentation has to be completed as part of the service offerings,” Sieberts adds.

Riaan Koppeschaar, general manager for corporate finance and treasury at coal and heavy minerals mining company Exxaro Resources, also in South Africa, is less sanguine.“Many international banks have reduced their exposures to emerging markets, and particularly to the mining sector,” he says. “So yes, [their] offering is shrinking.” Koppeschaar is the first to acknowledge that many factors are at play, what with emerging markets roiled by low commodity prices, foreign exchange volatility and overall economic headwinds. So it is hard to tell how much of the retreat by global banks is simply a case of protecting their bottom line. “I think most of it is a result of business and strategic thinking—probably 60%,” says Koppeschaar. This still leaves plenty of room for unwarranted de-risking.

That corporates in developed economies, too, are feeling the pinch suggests that a change in business strategy may be at least partly the cause. “New capital requirements are forcing banks to be much more drastic,” says Jean-Marc Servat, who chairs the European Association of Corporate Treasurers. “Some are getting out of certain businesses altogether, like cash management.” Often this happens suddenly, leaving corporates
scrambling to find alternative providers. To be sure, these moves affect Europe to a lesser degree than emerging markets, at least for now. “Although the landscape has not yet shown major changes, they are coming,” says François Masquelier, head of corporate finance, treasury and enterprise risk management at Luxembourg entertainment company RTL Group.“The economic situation and the quantity of regulations could exhaust banks.”

Regulators in Washington are aware of the problem, though they are still debating how much of it is really a result of unjustified, zero-tolerance risk avoidance by banks. Acting US Treasury undersecretary for terrorism and financial intelligence Adam Szubin stated in November 2015 at the American Bankers Association Money Laundering Enforcement Conference: “I want to emphasize that Treasury takes assertions of de-risking seriously, and we are working hard to identify and address the factors that lead US banks to terminate relationships.”

While the debate rages on, what are treasurers to do? “The strategic management of corporate treasury divisions will have to adapt to increased regulatory requirements,” says Gold Fields’s Sieberts.“While it may initially prove to be a bit burdensome to get these new compliance documents completed and reviewed, once it is done we should be able to continue our business without too many interruptions.”

Many treasurers are also getting creative. “We are moving on two fronts,” says Landa of Apoint Mexico.“We offer discounts to clients that pay in advance, to avoid cash flow problems. We are also looking into loans by smaller credit institutions, which have proliferated recently.” The move toward nonbanks is happening all over the world. “Treasurers may look at disintermediation,” says Exxaro’s Koppeschaar, “at nontraditional markets to replace banks’ offering, like insurance companies and sovereign funds.” Even in Europe, things are heading in this direction. “Some proactive treasurers have started to review their bank relationships to reduce them in order to increase efficiency,” says RTL Group’s Masquelier. “The more banks you work with, the more chances to make them unhappy. So we try in general to diversify sources of funding to reduce dependency on banks.”