Offshore banking continues to decline

Paul Byles
Paul Byles

The number of banks in the Cayman Islands dropped by 7 percent in 2015, compared to 2014.

The 12-month decline from 198 to 184 registered banks mostly concerned Class B banks, which are licensed by the Cayman Islands Monetary Authority but only allowed to offer services to customers outside of Cayman.

The number of locally operating Class A banks fell from 13 to 12 and includes six retail and six non-retail banks, the latest CIMA statistics show.

The banking industry has been diminishing constantly since the 1990s, when there were more than 500 banks registered in Cayman. The reasons for the decline range from consolidation in the industry to new regulations that have made operating offshore banks less cost effective. Most recently, the so-called “de-risking” by U.S. correspondent banks provided a new threat to the business model of offshore banks.

“The decline generally over the years is due to global consolidation of banks, which has resulted in their branches and subsidiaries merging across various jurisdictions,” said Paul Byles, managing director of First Regents Bank & Trust. “But more recently it has also become more challenging to operate in the offshore banking arena.

“Class B banks in particular are finding it very difficult to maintain correspondent bank accounts in the U.S. and elsewhere. As a result, I believe we will see a further decline in the number of licenses as shareholders question the point of having a Class B license.”

Cayman Class B banks often offer depository services to international clients and maintain access to the U.S. dollar clearing system by establishing correspondent banking services with local Class A banks in Cayman, which in turn have correspondent relationships with U.S. banks.

Local banks are under pressure by their U.S. correspondent banks which, under international regulations governing anti-money laundering, take a risk-based approach on a client by client basis.

While the guidelines defined by the Financial Action Task Force would require financial institutions to terminate client relationships only when money laundering or terrorism financing cannot be mitigated, banks have taken an increasingly risk-adverse view when evaluating their client relationships, including their business relations with Cayman banks.

During the past 18 months, many retail banks in Cayman started to inform their Class B bank clients that they can no longer offer correspondent banking services if they relate to funds of the bank’s clients.

This development is threatening the business model of those offshore banks that are not branches or subsidiaries of U.S. banks.

“The new policy of not allowing Class B banks to have correspondent banking accounts has the potential to wipe out an entire industry offering,” Mr. Byles wrote in a Cayman Islands Journal column in September.

The issue echoes the recent problems of money service providers in Cayman to access correspondent banking services that are needed to process remittance payments. Most services were terminated by the banks, which cited “de-risking” and costs as the primary reasons.

While the demand for private banking, once a staple service of offshore banks, is still growing globally, there is a danger that Cayman’s reputation for banking services is eroding in line with the fall in the number of banks, Mr. Byles said.

“Cayman’s reputation as a leading international banking sector continues to be one of the main features of the jurisdiction. But it’s hard to see how it can remain so if there is a dramatic reduction in the number of banks operating from the jurisdiction,” he said. “A jurisdiction that no longer accommodates smaller private banks runs the risk of losing this service offering entirely.”

The problem cannot be easily resolved because it is primarily due to external forces, as the pressure on local Class A banks is coming from their U.S. correspondent banks, Mr. Byles said. “But I also believe more can be done locally to assist the Class B banks with this challenge.”

Not all banks are affected equally. Cayman continues to be the sixth-largest financial banking center on the basis of its cross-border assets of US$1.37 trillion. International assets and liabilities of Cayman banks of US$1.39 trillion and US$1.44 trillion, respectively, were unchanged between June 2014 and June 2015, the latest available statistics show.

According to CIMA, more than 80 percent of more than the US$1.3 trillion on deposit and booked through the Cayman Islands, represents inter-bank bookings between onshore banks and their Cayman Islands branches or subsidiaries.

“These institutions present a very low risk profile for money laundering,” CIMA says on its website.

The authority notes that banking license holders represent 45 countries.

The recent decline mainly affected Class B licenses from Europe, the U.S., the Middle East and Africa. License numbers for the Caribbean, Central America, South America, Asia and Australia remained stable.


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