The reciprocity principle in correspondent banking relations. The case of Banca Commerciale Italiana in the first half of the twentieth century

This blog post examines the reciprocity principle in correspondent banking, focusing on Banca Commerciale Italiana (Comit) in the first half of the 20th century and explores its implications in global banking practices. In the interwar period, Comit was the most international Italian bank with a range of branches and subsidiaries in major markets (Figure 1), but correspondent banking was also crucial for the bank’s strategy.

Figure 1: Foreign network of Banca Commerciale Italiana (1932)

Source: ASI-BCI, Carte di Raffaele Mattioli, Serie 1 Miscellanee (ex Rodano), cart. 3, Studio di Raffaele Mattioli sul risanamento della BCI, 1933

Reciprocity, the bilateral (and balanced) exchange of services and business among banks, played a pivotal role in shaping strategic decisions and international banking relationships. This concept extended beyond mere transactional interactions; it encompassed both the turnover of payment services and the size of balances maintained. In managing their correspondent banking relationships, banks aimed to maintain a balanced and stable volume of business with their counterparts in different countries or regions. When a bank assigned a specific volume of financial transactions or business, such as payment orders and bills collection, to a bank in a different market, it expected a comparable volume of business deals in return. This principle of balanced business exchange demonstrates that the relationship between correspondent banks was not just transactional but also relational, fostering a network of cooperation and trust. It highlighted a key strategic consideration: how banks distributed their business in cities where they maintained multiple relationships. By spreading their business judiciously, banks could leverage reciprocity to sustain long-term, stable relationships, which were crucial in shaping their international banking strategy and network expansion.

Despite (or perhaps because of) Comit’s  global reach, centralized management for these relationships was lacking until the mid-1920s. The establishment of Comit's Relazioni Estere (Foreign Relations) office in 1925 marked a strategic pivot towards structured management of correspondent banking relationships. Circular letters from Relazioni Estere found at Comit’s collection (BCI) at Intesa Sanpaolo’s Archivio storico (Milan) open a window for scholars to understand the daily practices of international banking operations in the interwar period. Two examples illustrate this. On 5 February 1926, Relazioni Estere wrote that the Danish bank Privatbanken I Kjøbenhavn lamented that while they assigned most of their Italian business to Comit, Comit’s branches did not reciprocate. Therefore, Comit headquarters urged its branches to give more business to the Danish bank, for example by using the bank more frequently when they had bills payable in Denmark to collect. Solicitations from the Comit Headquarters were not necessarily triggered only by correspondents. Circular letter no. 35, sent on 16 September 1926 to all branches, noted that according to the statistics collected, the Zurich branch of Société de banque suisse assigned to Comit a sizable amount of business, which was not reciprocated. Thus, the Comit office urged branches to redirect part of their business assigned to other correspondents toward the Zurich bank.

Despite its commitment to reciprocity, Comit faced challenges. Establishing new affiliates and foreign branches also negatively affected the bank’s correspondent relationships. In 1929, Comit set up the Banca Commerciale Italiana e Greca, directing all Greek business to this new entity. However, recognizing some branches’ long-standing relationships with local Greek banks, Comit allowed them to continue allocating a portion of their business to these local correspondents, illustrating the nuanced approach required in managing these international relationships. Furthermore, when Comit set up a Trust Company subsidiary in Boston in 1929 business flows shifted significantly. When most of Comit's business in Boston was redirected to this new affiliate, it reduced business from large banks in Massachusetts, such as the First National Bank of Boston, which previously relied heavily on Comit for its business in Italy. This situation highlighted the delicate balance needed to maintain reciprocity and the consequences of establishing foreign affiliates on existing correspondent banking relationships.

Reciprocity and its challenges were not just crucial for Comit. Geoffrey Jones maintains that one of the critical factors in the successful expansion of Midland Bank’s correspondent network in the interwar period was its strategy of building correspondent relations with local banks rather than competing directly by establishing local branches^[1]. By contrast, he also finds that “both Lloyds and National Provincial lost French and Belgian business when their Continental subsidiary was established” (cit. Jones, 1982, p. 191). J.D. Nevertheless both Lloyds and National Provincial operated a broad correspondent network as well as a branch network. Except for Midland Bank, internationalisation strategies were not an either/or choice between correspondents or branches/subsidiaries. Santilhano, Jr., an employee at the foreign department of the Guaranty Trust Company of New York in the 1910s, confirms it:

"These relations are mostly of a reciprocal nature. If a bank in New York intrusts its business, for example, to a certain institution in Buenos Aires, it will expect this institution to carry an account with it and to intrust such business as it may have in the United States to the New York bank. Such reciprocal arrangements make for economies by which the customers of each bank benefit".^[2]

According to Santilhano, this concept of reciprocity had significant repercussions regarding internationalisation strategies when a bank decided to open branch or a subsidiary in a foreign market. In the first case:

"The bank's existing connections abroad will probably be lost. If a New York bank, which has been doing business in Buenos Aires with four or five established institutions, suddenly opens a branch there, it is likely to lose the greater part of the business it received from its former correspondents. The foreign bankers, being ordinary human beings, naturally prefer to divert their business elsewhere rather than to leave it in the hands of an institution from which they can expect little or nothing in return".^[3]

Figure 2. De Lima and Santilhano’s Financing, 1918.

Source: Google Books (2023).

While foundational, the reciprocity principle in correspondent banking revealed inherent limitations and inequities, particularly for smaller banks, as the interactions between larger institutions like Comit and smaller or affiliate banks evidence. For instance, Banco Italo-Egiziano, affiliated with Banco di Roma and Credito Italiano, had difficulties achieving reciprocal exchanges with Midland Bank in the late 1940s and early 1950s. The reciprocity issue remained unresolved even after the intervention by Banco di Roma’s London representative. Another case was Banca Dalmata di Sconto, affiliated with Credito Italiano, which initially had reciprocity with Bank of America in New York. However, following the latter’s merger with National City Bank, the reciprocal business ceased, leading Banca Dalmata di Sconto to rely on Chase Manhattan Bank, which ultimately did not reciprocate.

These examples underscore the complexity of maintaining balanced reciprocal relationships in correspondent banking, particularly for smaller institutions. While larger banks like Comit had the leverage to negotiate and enforce reciprocal arrangements, smaller banks often found themselves at a disadvantage, unable to command similar commitments from their larger counterparts. This imbalance highlights a critical aspect of international banking relations where reciprocity did not always equate to fairness or equality, especially for smaller, less influential banking entities. It also opens the question of how correspondent banking fit into the internationalisation strategies of European banks.

In conclusion, the principle of reciprocity in correspondent banking, exemplified by the historical journey of Comit and mirrored in global banking practices, underscores the intricacies and challenges inherent in managing international banking relationships. The concept of balanced business exchange, fundamental to this principle, facilitates mutually beneficial relationships and demands a careful strategic approach to global banking operations. From establishing its Relazioni Estere office to the nuanced management of its network, Comit's experience highlights the complexities and delicate balance required in maintaining reciprocal relationships. Furthermore, the experiences of other global banking institutions like Midland Bank, Lloyds, National Provincial, and the Guaranty Trust Company of New York emphasize the universality of these challenges and the impact of reciprocity on international banking strategies. These historical insights provide a valuable framework for understanding the dynamics of correspondent banking today, reminding us of the importance of strategic foresight and adaptability in an ever-evolving global financial landscape.