The Caribbean Association of Banks has warned that if no solution to the decline of correspondent banking relationships among financial institutions in the Caribbean is found, “the very livelihoods of Caribbean people will be in danger.”
The association said it supports statements by Christine Lagarde, managing director of the International Monetary Fund, that the refusal of large global banks to provide correspondent banking services to financial institutions in smaller nations in the Caribbean and other regions undermines key economic and financial transactions such as remittances, foreign direct investments and international trade.
In a speech to the New York Federal Reserve in July, Ms. Lagarde highlighted the issues faced by small countries and their financial institutions in accessing the international banking system and the danger that they could become marginalized.
Ms. Lagarde said large banks are withdrawing from smaller countries, a practice known as de-risking, as evidenced by the decline of correspondent banking relationships.
“This has to do with the fact that large global banks are under pressure to raise capital, streamline their business models, and re-evaluate their risk exposures. As a result, many of them have been in the process of closing business lines that they consider marginal to their bottom line, or detrimental to their risk profile,” she said.
This in turn has serious consequences for countries that have few options to participate in the global payment and settlement systems.
As of May, at least 16 banks across five Caribbean countries have lost all or some of their correspondent banking relationships.
The IMF recently issued a research paper, based on interviews with banks and regulators, which noted that the decline in correspondent banking has come after a broader reassessment by banks of the cost-benefits of their business lines.
In addition, there is considerable uncertainty among banks about their regulatory obligations and the possibility of large penalties and reputational risks related to the enforcement of sanctions, tax transparency and anti-money laundering, which have significantly increased the compliance costs for global banks.
As such, the decline in correspondent banking services is not necessarily the result of insufficient or lax compliance with anti-money laundering standards in some of the countries that rely on correspondent banking, but it is often driven by profitability considerations. Banks are specifically blaming excessive regulation and the fear of fines for failing to properly identify customers. But Lagarde said that high-profile enforcement actions in the past have focused only on cases where violations were repeated, systematic and egregious.
“They were not aimed at pursuing accidental one-off episodes due to insufficient information or lapses in judgment,” she said.
The problem is not confined to small nations. Large countries like Mexico and the Philippines, where remittances also play a key role, are experiencing correspondent banking problems.
The IMF called on the financial industry “to step up to the task” by looking beyond short-term risks to profitability concerns.
“There clearly is a business case that can be made for banking in small countries,” Ms. Lagarde said. “As technology confirming the authenticity and legitimacy of transactions moves forward – effectively reducing compliance costs for global banks – I would expect that smaller countries can be brought into the fold.”
The Caribbean Association of Banks said it strongly supports Ms. Lagarde’s proposed approach regarding de-risking.
The association has been active in raising the issue and its effects on the Caribbean region since 2014 when it brought the matter to the attention of Caribbean governments and other stakeholders.
The CAB requested regional intervention and highlighted that the loss of correspondent banking relationships could render the Caribbean region unbankable and ultimately destabilize all sectors of the economies.
In the Caribbean, the association said, the de-risking exercise of large global banks threatens to lead to financial exclusion, shrinking financial sectors, thriving of underhand economies, the increased use of unregulated payment options and slower economic development.
To demonstrate the extreme susceptibility of the Caribbean to de-risking practices, the CAB noted that Jamaica and Guyana’s average remittances represent 15 percent and 14 percent of GDP, respectively, for the years 2000 to 2013. Figures from 2009 to 2013 show that foreign direct investments account for as much as 15.4 percent of GDP for smaller states and 8.6 percent for larger states in the Caribbean.