What is SWIFT and why does it matter to markets?

Investors are closely monitoring the situation between Russia and Western nations, particularly the possibility of Russia being kicked out of the SWIFT network.

This article will explain what SWIFT is, why it is crucial to financial markets, and the potential consequences of banning Russia from the network.

What is SWIFT?

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. It is the primary communication channel for banks internationally, facilitating payment requests and record-keeping for the trillions of dollars of funds that move around the world.

SWIFT as a Communication Channel

SWIFT is a messaging service provider, allowing banks to communicate and settle payments. However, it does not handle the payments itself. Instead, it acts as a communication channel between banks, enabling them to coordinate and complete transactions .

Impact of Disconnecting from SWIFT

Disconnecting a bank from SWIFT makes it difficult to settle payments, affecting a country’s ability to settle payments for exports like oil, gas, or metals.

This is similar to what happened when Iran was blocked from SWIFT in 2012 and 2018.

SWIFT and Sanctions

SWIFT has made it clear that they are neutral and any decision to impose or lift sanctions on countries or entities rests solely with the competent government bodies and legislators.

The structure of SWIFT is overseen by G10 central banks, based out of Belgium.

SWIFT and Cryptocurrencies

Some argue that banning Russia from SWIFT could accelerate the use of non-US dollar denominated assets or cryptocurrencies, which could disintermediate financial transactions.

This could have significant implications for the global financial system.

SWIFT and Reliance on Fossil Fuels

Germany’s reliance on using SWIFT to close settlements for oil and gas could factor into their decision not to support a ban on Russia from accessing the SWIFT network. This highlights the complex interplay between financial systems and energy dependencies.

Impact on U.S. Banks

If a counterparty bank is removed from the SWIFT network, another bank, not necessarily in a sanctioned jurisdiction, will be affected.

Banks will need to find more complicated and potentially more expensive ways to transact these settlements, which could have implications for the banking industry (Chung, 2024).

Conclusion

SWIFT is a crucial communication channel for international banking, facilitating payment requests and record-keeping for trillions of dollars in global transactions. Disconnecting a bank from SWIFT makes it difficult to settle payments, affecting a country’s ability to settle payments for exports like oil, gas, or metals.

The potential consequences of banning Russia from SWIFT could have significant implications for the global financial system, including the accelerated use of non-US dollar denominated assets or cryptocurrencies.

As the world becomes increasingly interconnected, how can governments balance the need for financial sanctions with the potential disruption of global financial systems?