By Steve Slater

LONDON, July 4 (IFR) - Banks that are worried about breaching anti-money laundering and other compliance rules have axed the number of correspondent banking relationships in many regions by more than 10% in the past six years, raising concerns about the impact on poorer countries.

A survey released by the Financial Stability Board showed that from the start of 2011 to the end of 2016 the number of active correspondent banking relationships globally fell by 6%. The decline was more severe for US dollar and euro relationships, which both fell 15%.

"The decline in the number of correspondent banking relationships (CBRs) is continuing," the FSB said in a report on Tuesday.

The FSB, which coordinates financial regulation for G20 countries, said the decline was a concern because for affected countries it can lessen the ability to send and receive international payments, or drive payment flows underground.

That can have "potential adverse consequences on international trade, growth, financial inclusion, as well as the stability and integrity of the financial system," the FSB report said.

Massive fines on several banks for breaching trade sanctions and rules related to anti-money laundering, countering the financing of terrorism and other areas of compliance have prompted dozens of banks to cut their relationships with banks in countries in Africa, the Caribbean, Latin America and elsewhere.

Senior bankers have privately said that is because they fear getting slapped with a hefty fine by US regulators. Banks have erred on the side of caution, and cut relationships where they cannot be certain who they are dealing with, the bankers said.

The British Bankers' Association warned three years ago that western banks had cut hundreds of relationships with banks in emerging markets, hurting businesses, governments and people in poorer countries.

It prompted some government officials and bankers to urge a rethink to avoid hurting economies and driving financial transactions underground.

Two years ago the FSB launched an action plan to assess and address the decline in correspondent banking. It said on Tuesday the plan was making progress, but more needed to be done.

It said national regulators should clarify rules and supervision so banks know what is expected in their risk management.

The monitoring of trends and the impact on countries needs to be improved, and technical assistance providers need to coordinate help to affected countries to improve their anti-money laundering and compliance frameworks, the FSB said.

Developing 'know your customer' utilities could also help in conducting due diligence and reduce compliance costs, it said.





BIG DROP

The survey released by the FSB showed the number of CBRs fell most sharply in eastern Europe (down 16%), Oceania (down 12%) and the Americas excluding North America (down 8%).

Relationships in Europe excluding eastern Europe fell 15%, but the FSB said that was mainly due to the use of a Europe-wide payments system and consolidation in the industry.

In 2016 alone, the Caribbean and the small Pacific areas of Melanesia, Micronesia and Polynesia saw the highest rates of decline, of about 10% each, according to the survey of more than 300 banks and payment data from Swift.

The FSB said a number of sometimes related factors can explain the reduction in CBRs, including a reduced risk appetite among banks, issues related to anti-money laundering, countering the financing of terrorism and sanctions regimes, industry consolidation or a lack of profitability from the business.

The FSB will publish its next progress report in December. (Reporting by Steve Slater)