Bank of Valletta has confirmed that Deutsche Bank withdrew correspondent banking services for US dollar transactions but would not dwell on the reasons why.

Describing this as “a normal occurrence” in the banking sector, a BOV spokesman yesterday said Deutsche Bank had withdrawn these services from a large number of banks around the world “for its own reasons”.

Banks outside the US require a correspondent bank to clear transactions in dollars.

After the 2008 financial crisis, US banks became choosier in forging outside relations, forcing relatively small institutions like BOV to use the services of other, much larger European banks to clear dollar transactions. 

The BOV spokesman said the curtailing of correspondent banking was a cause for concern among international organisations, including the International Monetary Fund and the Bank for International Settlements.

I do not exclude the risk and compliance department adopting an overall sweeping strategy to reduce risk, which would largely impact small jurisdictions like Malta- Prof. Falzon

“This cutback on correspondent banking is mostly affecting smaller jurisdictions, including Malta, where business volumes are relatively low and therefore of limited interest to multinational institutions,” he said.

The spokesman said the Deutsche Bank decision would have no impact on BOV clients since the bank had similar arrangements with other European banks.

Questions sent to Deutsche Bank remained unanswered by the time of writing.

There has been speculation that the German bank’s decision may have been fuelled by doubts over Malta’s regulatory capacity in the wake of leaked information that showed how the police failed to act on suspicions of money laundering by politically exposed persons flagged by the Financial Intelligence Analysis Unit.

However, according to Joseph Falzon, head of the banking and finance department at the University of Malta’s faculty of economics, the curtailment is the result of growing regulation in the aftermath of the 2008 crisis.

“I do not know the reason why Deutsche Bank would have made such a decision but the German bank has had its own financial problems of late and I do not exclude the risk and compliance department adopting an overall sweeping strategy to reduce risk, which would largely impact small jurisdictions like Malta,” Prof. Falzon said.

He noted that in the post-2008 period US banks were the first to adopt very stringent compliance rules with European banks following in their footsteps at a later stage.

“In this environment risk and compliance management have progressively taken the upper hand in banking circles and we are now going to extremes.”