Welcome to the online only edition of Payments:Unpacked - in this edition I take a trip down memory lane and recall the role of wires, walks, town, diggers and funders in correspondent banking.
My first experience of the City, banking and payments was in correspondent banking - this type of banking might be unknown to some so let’s start with a definition.
Investopedia describe correspondent banking as:
The term correspondent bank refers to a financial institution that provides services to another one—usually in another country. It acts as an intermediary or agent, facilitating wire transfers, conducting business transactions, accepting deposits, and gathering documents on behalf of another bank. Correspondent banks are most likely to be used by domestic banks to service transactions that either originate or are completed in foreign countries. Domestic banks generally use correspondent banks to gain access to foreign financial markets and to serve international clients without having to open branches abroad.
Wires, walks, town, diggers and funders
At the weekend I had lunch with a friend and I quickly found out he had been a ‘messenger’ at the London office of a big overseas financial institution at about the time I first arrived in the City - a time when CHAPS was the new kid on the block!
Our conversation quickly became peppered with phrases such as ‘wires’, ‘town’, ‘bankers payments’, ‘telexes’ and, of course, the ‘walks’ that formed a key part of the messengers daily routine - all phrases that have fallen out of use.
This conversation led me to recall some of my early roles in the UK’s payments landscape. The worst role I had was as a ‘digger’ (more about that another time) but one role was very relevant to the conversation we had - my role as a ‘funder’.
Although CHAPS had been launched nine months before I arrived in correspondent banking the whole process of managing correspondent banking was almost entirely manual and based on SWIFT messages, telexes and CHAPS payments being printed on receipt and fed into a manual, paper based process.
With payment instructions needing to be made on behalf of our correspondent banking customers in the morning and the majority of corresponding credits being received later in the day via CHAPS controlling daylight exposure of up to £20 billion for 2,500 correspondent banks of all shapes, sizes and country situations was a challenge and a very manual process.
The role of the ‘funder’…
As a ‘funder’ I took control of a quarter of the accounts held (split by home country) and, on a piece of A4 paper for each active bank in my range, made a note of each payment value. I then authorised payments based on the opening balance or a daylight exposure limit. Ultimately, each account was expected to be ‘square’ at the end of the day and would have an exposure limit based on its home country - from ‘unlimited’ for Grade 1 down to zero for Grade 6.
If the payment amounts were within the limit for that country / bank then I initialed the paper instructions to confirm that the payments were ‘funded’ and a payments team would then make the payments by CHAPS if it could or Bankers Payment if not. In those days not all Sort Codes were addressable, CHAPS was ‘down’ quite a lot and I even remember manual typewriters and candles to cope with power outages.
If a payment was out of the daylight exposure limit I had to hold the payment pending receipt of funds which often took a lot of manual detective work to identify. Woe betide a ‘funder’ if he / she didn’t authorise a payment if funds were ultimately received or authorised a payment without funds being received. It was easy to be caught out by a regional office crediting the account remotely and ‘forgetting’ phone and advise that they had been the source of the funding.
For both printed outbound and inbound payments the only real audit trail was notes on the piece of A4 paper for each bank and, often, the source was not even a printed payment instruction but a shout out ‘can I have £5 million on bank XYZ?”. On one occasion this audit trail presented a problem - that was the day the banks auditors paid us a surprise visit!
Authenticated SWIFT messages received from a correspondent bank in a Grade 1 country did sometimes present a problem. On one occasion I ‘funded’ an authenticated payment for £800 million when, the instruction should have been for £800 million YEN - fortunately the receiving bank sent the money back via CHAPS very promptly!
Payments for banks based in Grade 6 countries often posed difficult challenges - one bank seemed to just swop £1 million a day between two London correspondent banks and each day there was a ‘cat and mouse’ game as we were both waiting for each others money to authorise the return payment.
With such a manual process it was difficult to control debits and credits over accounts subject to United Nation sanctions and banks in administration (such as BCCI).
By lunchtime the role of the funder changed to a detective eagerly scouring print outs of inbound CHAPS payments, Bankers Payments received, handwritten lists of maturing treasury deals and looking at logs of phone calls of funds received by regional branches.
As the CHAPS day was approaching its end it wasn’t unusual to have one payment for a few million left to ‘fund’. Having exhausted all sources of potential funds, failed to seek an authorised overnight overdraft the only option was to see whether the correspondent bank had sent a SWIFT MT210 ‘advice to receive’. Evidence of such an advice might make a relationship director more amenable to agreeing to an overnight overdraft or could provide opportunity to phone another London correspondent bank to see if cover funds had been sent. The ‘problem’ was that the MT210’s were ripped from a printer and thrown in a basket so the one MT210 I needed was, in effect, a needle in a haystack.
Long, square or short
Although the primary role of a ‘funder’ was to manually control the flow of funds in and out of a correspondent banks account our secondary objective was to be able to predict how each account would ‘finish’ at the end of the day.
Would it be ‘square’ (a balance of zero or the same ‘long’ or ‘short’ amount as at the start of the day) or would the account end the day with a new ‘short’ or ‘long’ position. The role of the ‘funder’ would be to report the adverse positions to the ‘Head of Money Control’ who would aggregate the position across 2,500 accounts and decide whether the correspondent banking branch would be contributing to an overall long or short position for the bank at the Bank of England.
With 2,500 accounts and in / out flows of upto £20 billion a day a manual process presented a challenge when a difference of £1m could be material. The fifteen minutes leading up to 3:15 were crucial in determining whether the bank would be ‘square’, ‘long’ or ‘short’ overnight at the Bank of England.
All very exciting stuff for a teenager who had just started out in a City career, the role of a ‘funder’ was fundamental to the banks daylight exposure but, thankfully, technology has replaced the ‘funder’ to provide a far more robust and effective process of controlling this type of credit risk.
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