Yahoo U: What is SWIFT?

Yahoo Finance Live's Brian Cheung explains what SWIFT is and how banning Russia from SWIFT could impact the U.S. economy.

Video Transcript

BRIAN SOZZI: Investors are carefully watching whether Russia gets kicked out of SWIFT. Well, what is SWIFT, and why does it matter to markets? Yahoo Finance's Brian Cheung is here with a new Yahoo U. Brian?

BRIAN CHEUNG: Hey, Brian. Well, amid all the sanctions on Russia, one we keep hearing about is a ban from SWIFT-- one that President Joe Biden said yesterday is off the table. Take a listen.

JOE BIDEN: The sanctions that we have imposed on all their banks is of equal consequence, maybe more consequence, than SWIFT, number one. Number two, it is always an option, but right now, that's not the position that the rest of Europe wishes to take.

BRIAN CHEUNG: But still, top Ukrainian officials are begging Western nations to ban Russia from SWIFT, which begs the question, exactly what is SWIFT? So let me show you some slides here that kind of break down exactly what we're talking about when we hear the buzzword of SWIFT. It stands for the Society for Worldwide Interbank Financial Telecommunication.

And really, what this is is the primary comms channel for banks internationally. So this facilitates payment requests, and it does the record-keeping for the trillions of dollars of funds that zigzag around the world-- which means if you disconnect them, it's going to be hard to settle any payments. It's going to cripple a country's ability to settle payments for their exports, like oil, or gas, or metals. And that's what happened when Iran was blocked in 2012, and then again in 2018.

Now, people might already be familiar with SWIFT if you've tried to wire money overseas. So let's make an example out of this, right? Let's say Brian's in Hong Kong. He owes Julie a bunch of money for whatever reason. He's got the money, and now he can finally pay her back. Well, Brian can use a SWIFT code to wire the money to Julie.

Let's say Brian's banking with HSBC. I don't know this for a fact. Let's say Julie uses Wells Fargo. He's going to enter in that SWIFT number, and then HSBC is going to use SWIFT to communicate with Wells Fargo to make sure that that payment can be done. The payment is not done on SWIFT. It's just a communications channel.

So imagine what happens if you're banned from SWIFT. Let's say one of these banks is no longer connected to the network. Well, you can't facilitate the payment there, but that doesn't mean that Brian can't get his money over Julie, right? It just means that you'll have to use other types of channels. So maybe he's going to use a cryptocurrency, for example, or maybe he's just going to put a bunch of cash into an envelope and then send it over to Julie.

Think of what's going on here within the context of nations and large institutions. It's exactly the same thing. Just because a bank is disconnected from the SWIFT network doesn't mean they can't facilitate the payment. It just means they can't use the comms channel of SWIFT to get that transaction done.

So really, at the end of the day, SWIFT is just a messaging service provider. And they've made it clear that they're neutral. It's overseen by G10's central banks. That's the structure of SWIFT, which is based out of Belgium. But they've made it clear that, quote, "any decision to impose or to lift sanctions on countries or individual entities rests solely with the competent government bodies and legislators."

So kind of in closing here, guys, think of SWIFT as more like the Slack messaging that we use here at work, even, right? Just because Slack goes down doesn't mean we can't get back to business. It just means we have to figure out other ways to get around it.

That's one reason why people have said maybe banning Russia from SWIFT would actually just accelerate the use of a non-US dollar denominated asset, or perhaps cryptocurrencies, which could disintermediate things. And then, within the context of Germany, consider that their reliance on using SWIFT to close settlements for, let's say, for example, oil and gas, is something that might be factoring into their decision to not want to support a ban on Russia from accessing the SWIFT network. All things to think about as we continue to get these headlines on the sanctions, guys.

BRIAN SOZZI: Brian, I think those pictures perfectly captured things. You could see how I was depressed sending Julie all that money, and she was very excited about receiving it. So it's a big win for Julie, a big loss for me. But while we have you, real quick, Brian-- what is the impact, or what would be the impact, to banks like a JP Morgan, a Citigroup, if this actually happens?

BRIAN CHEUNG: Yeah, well, as I kind of showed through that diagram earlier, if you X a counterparty bank from the SWIFT network, that means that another bank somewhere else, which is not necessarily in a jurisdiction that's being sanctioned, is going to get impacted as well. They can't complete the other side of the transaction, whether they're the person sending or receiving the money. So when we talk about the banking industry, we have to remember that it's not like the SWIFT network, again, is going to be the end-all for getting payments done. It's just going to mean that these banks will have to find longer, more complicated, and in many cases, more expensive ways to transact these types of settlements.

So any way you cut or slice it, that's one reason why, perhaps, Germany is saying, well, we might not support a SWIFT sanction here, because the reliance, for example, on Russian natural gas specifically, as we've seen with the Nord Stream 2 pipeline, is perhaps one reason why German banks, for example, might be more exposed than, say, United States banks, where the dealings with Russia might not be as intricately intertwined. So I think that's going to be a big threat to watch as well. But important to note that yesterday, despite the weird rebound that we saw back in equities, actually, US bank stocks still took a harder hit as well.

BRIAN SOZZI: Brian Cheung, catch you in the 11 o'clock hour. Appreciate that.