Inside Business: Retrenching banks - FT.com "Correspondent banking" sounds like a quaint throwback to the days of far-flung empires. It conjures up images of foreign diplomats wiring money from the City of London to the outposts of the British Raj. But while today's international financial flows may be more sophisticated than they were a century ago, the concept of correspondent banking - long a key foundation stone of global trade - remains crucial in a post-financial crisis world. In essence, the term refers to the idea of small locally anchored banks using a big bank to deal with the international business they cannot handle themselves. Since 2008, the number of banks that can claim the reach to fulfil that international role has shrunk. Banks that 10 years ago might have claimed to be universal banks in every sense of the term - not only combining retail, corporate and investment banking under one roof, but also doing so across the globe - have deliberately retrenched to cut costs and improve profitability. Today, only a handful of names - led by the likes of Citigroup, HSBC and JPMorgan - retain that kind of profile, making them the go-to names for correspondent banking. However, as the Financial Times reported on Monday, even they are pulling back from some relationships around the world. Bankers say that in these cases - particularly in certain out-of-the-way parts of Asia, Africa and the Middle East - it is becoming either impossible, or economically unviable, to maintain those correspondent banking relationships. This is no abstruse technical point. There are a real consequences - not just for banks, but for their customers and the dynamics of world trade. Unless the architecture of correspondent banking is robust, particularly in the core area of trade finance, a global economy that is still struggling to shake off the burden of the crisis cannot hope to prosper. The underlying picture is hardly encouraging. Last week, in a speech at the Institute of International and European Affairs, Pascal Lamy, director-general of the World Trade Organisation, warned that trade volumes for 2013, although predicted to be up from the "poor 2 per cent growth" of 2012, looked set to grow "by a sluggish 3.3 per cent, well below the 20-year average of around 5 per cent." Some of the structural challenges to the trade finance market have been overcome. International capital rules, for example, have been eased. Eighteen months ago, regulators agreed to treat trade finance as the short-term credit it is, allowing banks to hold capital against this type of lending for three months on average, rather than the previously assumed minimum of 12. But, as bankers on the WTO's trade finance expert group told Mr Lamy a couple of weeks ago, there is another threat to the continuing health of a global trade finance market: excessive anti-money laundering controls, costly "know-your-customer" compliance rules, and an uneven application of the rule book in different parts of the world. Banks are hardly in a strong negotiating position. HSBC was last year fined $1.9bn over the laundering of Mexican drug money and other abuses dating back over the past decade. More recently, Citigroup was warned by regulators at the US Federal Reserve to improve its controls in Mexico, although it avoided a fine. All the same, Mr Lamy is not deaf to the banks" argument. Emerging market trade - which is currently growing at five times the rate of developed markets - is underpinning the global recovery. But it could falter if the big banks retrench further from smaller markets, hampering the ability of trading companies in those countries to export their wares. Mr Lamy told bankers at their recent meeting that he was prepared to raise the issue with G20 leaders, although one person present said the organisation was treating the anti-money laundering issue "with chopsticks" because it is so delicate. Longer term, there is every hope that the evolution of strong regional banking champions from the fastest growing emerging markets - the likes of DBS in Singapore, or Itaú-Unibanco in Brazil - will become viable global correspondent banks in their own right. That should add to international competition and cut prices for trading companies on the ground. In the meantime, though, as politicians, bankers and companies seek ways to bolster fragile growth, there are likely to be more calls for regulators to show pragmatism. What should be prioritised: the war against economic stagnation, or the battle against drugs and terrorism? Whatever the answer, banks are right in the middle of it. Patrick Jenkins is the FT's banking editor