Correspondent Banking Will Still Grow Strong In The Future.

Correspondent Banking Will Still Grow Strong In The Future.

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As trade growth continues to drive banks and businesses to pursue opportunities in emerging markets, the future of correspondent banking looks strong. Certainly, correspondent banking provides a means of accessing these hard-to-reach markets by matching extensive coverage with local expertise.

Yet there has been a recurrent tendency in the finance industry to declare the death of correspondent banking. Predictions of its demise have been issued on a routine basis since at least the 1970s, as innovation has increasingly provided the larger international banks with the technological and financial capabilities to match their global ambitions. Given this, it is not surprising that the image of correspondent banking can sometimes seem old fashioned. After all, the practice in its modern form extends back over 200 years to the system of interbank deposits at work in the United States, prior to the creation of the Federal Reserve. There are even indications of limited correspondent account activity in 14th century Venice.

Indeed, combined with larger trends in the sector, such as the increased consolidation in global banking, and the extension of branch networks by global banks, these changes have led to valid questions being raised as to the continued viability of the correspondent banking model. The statistics, however, paint rather a different picture. Despite the predictions, correspondent banking remains in rude health. A World Bank study on Brazil, published in 2006, revealed that the number of correspondent banking outlets increased from 6,000 at the turn of the millennium, to over 38,000 in 2004. Despite the financial crisis, this growth has continued throughout the BRIC countries and other emerging markets, as these areas become increasingly integrated into the global economy. This is because the fundamentals of a properly administered correspondent banking network not only remain sound, but retain distinct advantages over alternative models.

When selecting a bank, many SMEs and consumers value local decision-making, and staff that understand them intimately. However, they also require the ability to make international transactions for both currency and credit. Correspondent banking is a means of bridging this gap through combining the local expertise of a community bank, with the trade finance infrastructure of a leading international bank.

The advantage to customers is that complex trade finance processes, such as the negotiation and settlement of Letters of Credit (LCs), can be overseen, or even undertaken, by a correspondent bank with expert knowledge of the local regulatory environment. This is an enormous advantage when trading with China for example. Strong correspondent banking relationships support handling and generating LC business.

The outlook for correspondent banking remains strong. This is not because an archaic system has become deeply entrenched, but rather because it is an excellent means of bridging the gap between local expertise and global coverage, in a manner that is beneficial to both banks and clients. Correspondent banking networks are able to connect Mittelstand companies in the developed world (including midcap companies beyond Germany) with the financial institutions used by their trading partners and then beyond them to the rapidly-expanding consumer base in the developing world.

Correspondent banking is a system well suited to providing services, and therefore access, to emerging markets. If anything, as globalization continues apace, and the intensity of global trade continues to grow, it is likely to increase in importance, especially as clients seek to penetrate ever further into new and previously remote markets.

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