Pakistani-American Banker Heads SWIFT, The World's Biggest InterBank Payments System

[Riaz Haq]

Pakistani-American banker Yawar Shah is the Chairman of the SWIFT Board of Directors. SWIFT stands for The Society For Inter-Bank Financial Telecommunications. SWIFT has been in the news recently for cutting off Russian banks to punish Russia's invasion of Ukraine. Russia is now disconnected from the global financial system used to settle the vast majority of payments in international trade.  

Yawar Shah. Source: SWIFT

In addition to his role as the Chairman of the SWIFT Board of Directors, Yawar is also a Managing Director in the Institutional Clients Group at Citigroup. Before joining Citigroup, Yawar was at JPMorgan for over 20 years. Positions there have included Global Operations Executive for Worldwide Securities Services, Retail Service and Operations Executive, Chief Operating Officer of the Global Private Bank, and General Manager of the Treasury Management Services business. He received his BA from Harvard College and his MBA from Harvard Business School.

Another Pakistani-American, a woman named Saira Malik, has recently been appointed the chief investment officer (CIO) of a $1.3 trillion Nuveen fund.  Saira held a variety of positions since joining Nuveen in 2003. Prior to being named CIO, she was head of global equities portfolio management, and before that, head of global equities research. Previously, Saira was with JP Morgan Asset Management, where her roles included vice president/small cap growth portfolio manager and equity research analyst.

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) was founded in 1973 to replace the telex system. It is now used by over 11,000 financial institutions to send secure messages and payment orders. Disconnecting an entire country from SWIFT is considered the nuclear option of economic sanctions, according to South China Morning Post (SCMP). But even limited action can have a big impact. Any bank disconnected from SWIFT will have a very difficult time sending money to other financial institutions, and its customers will struggle to conduct their business. 

US$ Share of SWIFT Payments. Source: Atlantic Council

The only alternative to SWIFT is China's CIPS, the Cross-border Interbank Payment System. CIPS was launched in October 2015 to boost international use of China’s currency in global trade settlements.  The use of the yuan has increased since its inclusion in the International Monetary Fund’s Special Drawing Rights basket in 2015. In January this year, CIPS had 1,280 users across 103 countries, including 75 directly participating banks and 1,205 indirect participants. The operator said last year overseas indirect participants account for 54.5 per cent of the total. 

Russian Foreign Currency Reserves. Source: Statista

The central banks in western nations and Japan hold the bulk of the Russian foreign currency reserves of about US$630 billion which they have now frozen. But China is the single-biggest foreign holder of Russian central bank reserves as of June 30, 2021. 13.8% of the total of Russia’s reserves, held in gold and foreign currency, are located in China, roughly the same share of assets held in Chinese currency Yuan Renminbi.

Russia's Attempt to Sanction-Proof Economy. Source: Wall Street Jou...

Latest round of western sanctions on Russia reinforce a growing perception that the United State is abusing its extraordinary financial power to arbitrarily punish different countries through its unilateral financial sanctions. This power stems mainly from the fact that the US dollar is the main international reserve and trade currency. It allows US to control multi-lateral financial institutions like SWIFT, World Bank, IMF and FATF. Many countries, including major US allies in Europe, are now looking to find alternatives to SWIFT. This has been specially true since former US President Donald Trump existed the JCPOA (Joint Comprehensive Plan of Action) agreed among the 5 permanent members of the UN Security Council (P5) plus Germany. Here's an excerpt of a recent New York op ed by Peter Beinart: 

"By deluding themselves about the extent of America’s might, they are depleting it. A key source of America’s power is the dollar, which serves as the reserve currency for much of the globe. It’s because so many foreign banks and businesses conduct their international transactions in dollars that America’s secondary sanctions scare them so much. But the more Washington wields the dollar to bully non-Americans into participating in our sieges, the greater their incentive to find an alternative to the dollar. The search for a substitute is already accelerating. And the fewer dollars non-Americans want, the harder Americans will find it to keep living beyond their means."

Share of Export Invoicing in US$. Source: Atlantic Council

Chinese analysts see the SWIFT sanctions on Russian banks as a wake-up call for Beijing. “As seen from Russia’s Swift exclusion and the China-US trade friction in recent years, it is necessary to reduce reliance on Swift to ensure financial security,” Dongguan Securities analysts Chen Weiguang, Luo Weibin and Liu Menglin wrote on Monday, according to SCMP.  The move to ban certain Russian banks from Swift is likely to accelerate expansion of CIPS, Beijing’s cross-border payment and settlement system, analysts say. 

Pakistan's State Bank and National Bank are members of both SWIFT and CIPS. CIPS has been used by Chinese and Pakistani banks for trade settlements in Chinese Yuan. In 2018, the China-Pakistan currency swap agreement was extended for three years, and the size was doubled to 20 billion yuan or 351 billion Pakistani rupees, as China became the largest trading partner, and the bilateral trade increased on yearly basis, according to China Economic Net. 

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[Riaz Haq]

Speaking at ET Awards for Corporate Excellence 2023 last week, the veteran banker had said, “I genuinely feel that the biggest financial terrorist in the world is the US dollar." Telling why he feels this way, the Kotak Mahindra Bank chief stated that all our money is in nostro accounts and somebody in the US can say

https://youtu.be/QXC9BsiRLlU

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'I'd like to correct': Uday Kotak clarifies ‘financial terrorist’ statement about US dollar

In the March quarter, Kotak Mahindra Bank witnessed a notable increase in its standalone net profit, which rose by 26.3 per cent year-on-year to reach Rs 3,495.6 crore

https://www.businesstoday.in/industry/banks/story/uday-kotak-clarif...

Uday Kotak, the CEO of Kotak Mahindra Bank, has provided further clarification on his recent statement about the US dollar being the "biggest financial terrorist in the world." Kotak clarified in a tweet that his statement about the "financial terrorist" was not specifically aimed at the US dollar but rather at the disproportionate power that any reserve currency holds.

According to Kotak, the US dollar's status as a reserve currency gives it an unfair advantage in controlling global transactions, which could potentially result in other countries becoming overly reliant on it. He further elaborated that a reserve currency wields significant power, including the ability to dictate whether money in nostro accounts can be withdrawn, which can have a profound impact on the global financial landscape. Kotak believes that the world is actively searching for an alternative reserve currency and posits that India has the potential to promote the Indian Rupee as a strong contender to fill this role on the global stage. By doing so, he suggested that India can reduce its dependency on the US dollar and promote a more diversified, stable global financial system.

He clarified his previous statement in a tweet saying, "In a recent discussion on the US dollar, I inadvertently used words 'financial terrorist,' which I would like to correct. What I meant was that a reserve currency has disproportionate power, whether it is nostro account, 500 bps rate increase, or emerging countries holding $ for liquidity."

In the March quarter, Kotak Mahindra Bank - the second-largest private bank in India - witnessed a notable increase in its standalone net profit, which rose by 26.3 per cent year-on-year to reach Rs 3,495.6 crore. The bank's net interest income (NII) also saw a significant jump of 35 per cent YoY to reach Rs 6,102.6 crore.

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A nostro account refers to an account that a bank holds in a foreign currency in another bank. Nostros, a term derived from the Latin word for "ours," are frequently used to facilitate foreign exchange and trade transactions.

https://www.investopedia.com/terms/n/nostroaccount.asp#:~:text=A%20....