May 8, 2017 / 7:01 AM / in 3 months

Chinese bank payment networks surge as Western lenders cut ties - study

4 Min Read

* Chinese correspondent banking relationships surge 3,355 pct

* U.S., EU banks cutting ties amid regulatory crackdown

* Malaysia correspondent banking ties fall following 1MBD scandal

By Michelle Price

HONG KONG, May 8 (Reuters) - Chinese banks have dramatically expanded their overseas payment and trade networks since the global financial crisis, exploiting a growing vacuum created by Western lenders which are retreating from higher-risk jurisdictions, new data shows.

The number of so-called "correspondent" or bank-to-bank relationships operated by Chinese banks surged more than 3,300 percent - from 65 in 2009 to 2,246 in 2016 - according to data published by U.S.-based payment and compliance technology company Accuity on Monday.

This contrasts with a 25 percent drop in the number of correspondent banking relationships globally during the same period, largely caused by U.S. and European banks cutting ties with smaller bank clients in regions such as Asia and Africa.

Correspondent banking describes bank-to-bank relationships that allow individuals and companies to move money around the world, facilitating global trade.

Although Chinese correspondent banking relationships have grown from a low base and still account for a small proportion of such relationships globally, the huge jump underscores how Chinese lenders - such as ICBC and Bank of China - are fast-globalising to support Chinese companies as they push overseas.

"These contrasting trends suggest that Chinese banks recognise the opportunity to facilitate China's international trade, possibly at the expense of EU and USA global banks who are concerned with the higher risks and costs associated with providing these correspondent banking services," said Henry Balani, Global Head of Strategic Affairs at Accuity.

Accuity compiled the data, which is extracted from standard settlement instructions, from an average of 29,000 banks in 238 countries or territories across the world.

Global banks are under intense regulatory pressure to guard against money laundering and terrorist financing by closely screening the source of funds they handle.

U.S. watchdogs have dished out more than $16 billion in fines for antimoney laundering (AML) compliance failings since the end of 2009, while banks globally spent an estimated $12 billion on AML compliance programmes last year, according to data compiled by Hong Kong consultancy Quinlan & Associates.

This ballooning compliance bill has made it more cost-effective in many cases for big banks to simply cut off smaller banking clients in higher-risk geographies.

Correspondent banking relationships in Malaysia, which has been rocked by a money laundering scandal involving the country's 1MBD sovereign wealth fund, for example, fell from 1595 in 2014 to 621 last year, the data shows.

The U.S. regulatory crackdown may also be making it more attractive for banks to transact in the yuan rather than the U.S. dollar because dollar transactions are subject to U.S. regulations regardless of where they take place, Balani said.

"The U.S. dollar dominates world trade, but there is a trend towards a decline in the use of the U.S. dollar and an increase in the use of the renmimbi," he said.

Reporting by Michelle Price; Editing by Stephen Coates

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