New reporting rules imposed by regulators on daily liquidity reporting and monitoring by banks are heightening the compliance challenge and could change the nature of correspondent banking irretrievably. “Reciprocity has died,” declares Dennis Sweeney, head global liquidity and collateral relationship management at Societe Generale. “Banks no longer open accounts in order to get more business in another area.”

In pre-2008, the world’s largest financial institutions brag about the breadth of correspondent banks they have even in the far-flung corners of the world. The marketing sound bites were often about how business can be done in the most obscure markets and trades can be settled in its local currency, thanks to the concept of reciprocity and correspondent banking. You don’t hear that now as many of these banks scale back, some aggressively, on their network of partner-banks.

As regulators put ever increasing onus on them to comply with tighter rules to de-risk the business such as know-your-customer and anti-money laundering measures, banks have to manage within a smaller circle of designated counterparties. At the same time, the intra-day reporting and monitoring mean even more resources spent on the collection of data.

In fact, it isn’t even the collection of data that is the issue anymore. It is now all about the quality of the data and its enrichment. Sweeney says that while progress has been made in terms of agreeing which Swift messages to use and the information delivered the following day, now the requirement is for data to be available on an intra-day basis. “This requires that information is enriched every day of the week by organizations that are committed to improving their reporting.”

An even bigger challenge, he adds, is banks’ capability to send the information back to their clients who in turn are using it to report on their own intra-day liquidity controls. The solution to some of these challenges, Sweeney suggests, may be outside the banking industry such as in telecoms and aircraft manufacture.

“Telcos enable users to buy goods via their hand held devices and within minutes the user has received a large amount of data with their receipt,” he cites. “If something goes wrong, the purchaser has all of the information he or she needs to seek redress. We don’t have that in the banking industry.”

It is the same in the aircraft industry. He says that everything that is done, right down to ordering screws for the fuselage, is documented, reported and audited. “It would be possible to do this in correspondent banking but identity and standards are two big issues that need to be addressed.”

By requiring banks to report intra-day, Sweeney says the regulators are attempting to track how much banks are lending on an intra-day basis without keeping records. “Artificial liquidity, whereby a bank will make an undocumented loan to another during the day, is really the granting of credit,” he points out. “It is based on the past when banks provided services that were based on a daily limit and were designed to ‘help each other out’. Artificial liquidity, or loans without commitment, were in the system along with intra-day set credit limits.”

In the US, he says that banks have to report to the Fed on their intra-day lending several times a day and are charged for it. This liquidity of course becomes a problem during the collapse of a bank, as has happened with Lehman Brothers. “There is never a good time to stop a bank’s activities – many banks now run global operations on a 24x7 basis. Debt is moveable and is linked inextricably to the parent company.”

The industry could collaborate and universally agree to stop intra-day credit lending, Sweeney notes. But it would be a dramatic move. “It could be decided that organizations should not operate unless they have cash in bank accounts or provide collateral to secure overdrafts. We are eight years on from the financial crisis and we are still reeling – I am surprised such moves have not yet been made. Banks are operating in a restricted environment but are still offering intra-day credit, albeit to fewer organizations.”

Structural reform, such as the ring-fencing proposals in the UK, will put additional strain on liquidity as bank groups are broken up into smaller entities, he says. These smaller banks will have a different central point of liquidity from which to draw and there will be challenges.