Unit 3 international financial services

Text 3.1

Correspondent banking faces a problem of definition. Five years ago the business was preoccupied with electronic funds transfer. The spread of Swift's messaging network* and the developing of the equally efficient clearing systems promised to elevate the medium through which banks communicate and fined the traditional concept of correspondent banks talking to each other.

By streamlining this function, however, the nature of the business changed and the importance of nurturing interbank relationships dwindled in the eyes of some correspondent bankers. Technology tends to lead to concentration, because the customer has gone to the bank that is bigger and faster and can handle more volume.' explains lan Cormack, who heads Citieorp's financial institutions group in London and sits on the council of the clearing system in the UK.

Moving or receiving money has always been at the heart of interbank activity. Lawrence Grand, international banking director at Barclays, makes the fundamental point that correspondent banking will always exist in a world where banks have to talk to other banks to conduct money transmissions This view is shared at Manufacturers Hanover, where 35 Joseph Longaberdi. a banking vice president and senior representative, believes funds transfer business is still the major product over which correspondent banks wage battle.

But while the need to balance interbank accounts remains a core function of the business, the complexion of the funds passing through the payments system has altered dramatically. The rise and rise of financial activity has displaced trade-related flows, particularly in the period after Big Bang, until today around 90 per cent of the business consists of financial transactions, estimates Mr Cormack.

Volumes continue to rise significantly in the major clearing centres, largely feeding off growth in securities* processing and foreign exchange. The value of dollar- dominated transactions passing through New York's clearing house inter-bank payments sytem (Chips) increased by 23.7 per cent last year to a daily average of $526 billion, equivalent to 126,840 transactions a: day, and compared with $425 billion and 113,758 transactions in 1986.

In London's sterling market the value of daily transactions passing through the clearing house automated payments system (Chaps) climbed by 28.5 per cent in the year ending March 1988 to £45 billion, or 23,441 transactions a day, compared with £35 billion and 20,958 in the previous 12 months.

Keeping pace with growth has not been easy, particularly for the bank which for reasons of size, cost and strategy have been confined to a marginal role in the business. Commitment to the technological infrastructure is vital. Five years ago Manufacturers Hanover had $75 million invested in a worldwide telecommunications network. Anyone who baulked at such an investment five years ago would find it difficult to enter the market today.

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