EBA CLEARING company study highlights changes in correspondent banking practices

Findings from a study carried out by the EBA in March, indicate that in the new euro environment payment trends are triggering an evolution in correspondent banking.

Willy Scheerlinck, Chairman of the EBA Clearing Company, said: "Our study shows that greater usage and a better understanding of the new payments environment allows correspondent bankers to add greater value by enabling them to focus more on their relationships with their clients. This shift in correspondent banking is clearly reflected in the new payments routing practices which themselves are driven by increased transaction volumes and further focus on liquidity management."

The EBA study shows that daily volumes through EURO1 are surpassing 67,000 payments – a total daily value close to EUR 200 billion. This signals a progressive change from correspondent banking based on account reciprocity towards more extensive use of clearing and settlement systems. However, the study also shows that this process of evolution in correspondent banking has some way to go. Although the total number of euro cross border transactions presently handled by all payments systems are around 110,000 per day, of which the EBA Clearing Company has already captured a major part, the total number of cross border payments in euro is estimated closer to 400,000. A significant part of payments traffic is still found in traditional correspondent banking routes.

The study shows that after a rapid increase in the first few weeks of euro clearing, the average daily volume in EURO1 levelled at 53,000 and then increased further as banks progressively switched their payment routing. However, the daily value processed did not increase proportionately to volumes, this reflected the growth in the number of smaller commercial payments as against interbank payments with EURO1.

Although banks noted there were no technical problems at the EURO 1 level, there were occasionally issues arising during the settlement phase at the level of TARGET. Evidence from the study indicates that many banks have worked together to develop practices which reduce operational risks.

During the first few weeks of the euro, the study identified that the co-existence of different euro payment systems could generate imbalances in a bank’s daily liquidity position amongst the different systems. This arose because of banks’ differing approaches to the use of the various systems – almost half of the banks confirmed that they have used inter system swaps to exchange liquidity between systems and now this practice has decreased because there is a greater familiarity of the practical aspects and understanding among the banks about how best to employ the systems.

The EBA Clearing Company also announced that four new clearing banks have joined EURO1 - Banca Popolare di Milano, Italy; Raiffeisen Zentralbank, Austria; Merita Bank, Finland and Banco Pinto & Sotto Mayor, Portugal. This brings the number of clearing banks within EURO1 to 65. It is expected that another four banks will join by July and a further eight in September, bringing the total number of participants in EURO1 to 77.