Addressing the final day of the two-day Caribbean Response to the Withdrawal of Corresponding Banking Conference “here, the IMF Deputy Managing Director Tao Zhang said the withdrawal of correspondent banking relationships, also known as CBR, is a problem not only observed in the Caribbean.
He said countries in Africa, Asia, Europe, and the Middle East are also losing banking services that keep them connected to the global financial system.
“This issue received substantial attention during the IMF Annual meetings earlier this month. Policy makers, regulators, and bank representatives attended a conference there to discuss solutions to the problem. This is a collective problem that calls for a collective solution,” Zhang told the conference here being hosted by the Antigua and Barbuda government and attracting delegates from the 15-member Caribbean Community (CARICOM) grouping, as well as regional and international financial institutions and other stakeholders.
Correspondent banks, which are mainly large, international banks domiciled in the United States of America, Europe and Canada, provide Caribbean states with vital access to the international financial system, by offering services to smaller, domestic banks and financial institutions to complete international payments and settlements.
However, many banks, which provide correspondent banking services have been seeking to manage their risks by severing ties with institutions in the region.
The issue of corresponding banking was a major item at the annual summit of CARICOM leaders in Guyana in July and the meeting is here is as a result of such deliberations.
The IMF official told delegates that the Caribbean Association of Banks (CAB) has indicated that almost 60 per cent of member institutions that it has interviewed report a loss of such relationships.
“This is creating a difficult situation for some affected countries. For example, banks in Belize with assets equivalent to half of gross domestic product (GDP) are affected,” Zhang said, noting that in some cases, while Caribbean banks have been able to hold on to their correspondent relationships, key services have been discontinued.
These include check clearance, trade finance, and wire transfers. He said some banks face higher costs for the remaining services and that in many other cases, global correspondent banks have withdrawn from transactions involving money transfer operators.
“But these operators traditionally have been the intermediaries for remittances, which are a crucial source of income for the most vulnerable people in the Caribbean.
“If the trend is not arrested, it could damage not only financial stability, but also economic growth, financial inclusion, and other development goals. Of course these potential consequences are worrisome.
Moreover, the continued loss of legitimate correspondent banking services may drive legitimate transactions underground.”
He said this would encourage transactions in cash and increase other forms of informality.
“So the end result could be to undermine the objectives of the progress we have seen in the effort to supervise and regulate the financial sector services and activities, including the effort to fight money laundering and combat the financing of terrorism.”
Zhang said that the withdrawal of CBRs is partly a reflection of cost-benefit trade-offs growing out of increased regulation and enforcement affecting international banks, global banks.
He said regulatory reforms have produced increased bank capital and liquidity requirements and this has contributed to reduced profitability of correspondent banking.
In addition, compliance costs have increased because of the intensified efforts to combat money laundering and terrorism financing. Banks also have to respond to efforts to promote international tax transparency.
The IMF official said the bottom line is rising expenses, relative to the potential benefits associated with banks’ engagement in the region.
“Global banks acknowledge that decisions to withdraw some services have been driven partly out of fear of large sanctions. They point to a risk-assessment of respondent banks’ ability to implement adequate customer due diligence.
“The tendency toward drastic action has been more likely where regulatory expectations are unclear and risks cannot be mitigated,” he said, urging that in order to deal with the situation Caribbean authorities and those in other affected countries have been actively addressing this policy challenge in global meetings and in interactions with developed country officials.
He said this already is having significant results: regulators in the home countries of global banks are becoming more proactive in clarifying their regulatory expectations.
For example, the U.S. Treasury Department is putting considerable resources into educating financial institutions on the precise nature of transactions and behaviours that are subject to sanctions.
In the region, reports of the Caribbean Financial Action Task Force indicate that countries are making progress bringing their Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) frameworks to international standards.
But Zhang said effective implementation and enforcement remain a challenge and to this end, the Eastern Caribbean Currency Union (ECCU) member states have decided to consolidate their national AML/CFT work into one regional operation, under the responsibility of the Eastern Caribbean Central Bank (ECCB).
He said most countries have also signed an intergovernmental agreement with the United States to facilitate compliance with U.S. tax law and are also committed to implementing the OECD Common Reporting Standards with the first information exchanges targeted for the next two years.
But the IMF official said despite these and other measures there is an urgent need for action to mitigate the impact on affected economies, outlining three areas he said he believes Caribbean countries should explore further.
He said they should seek to address the problem of economies of scale; mitigating cost and technical limitations and improving information flows.
“As small states, the Caribbean countries are likely to offer relatively small volumes of CBR transactions. This makes it difficult for banks to generate economies of scale–and therefore higher profits from CBR activity.
“We need to determine whether small Caribbean banks can bundle transactions to create the scale required for global banks to maintain banking services.”
Zhang said that for example, countries should explore if there is scope for some consolidation of banking systems in the region.
“If there is, how to do it? Can it be done through public or private initiatives, or some combination of the two? In each of these options, what are the benefits and costs? Second, on cost and technical limitations. Technology can be part of the solution by reducing compliance costs and strengthening “know-your-customer” frameworks.”.
He said on the one hand, various industry solutions can be considered in the region to reduce the cost of compliance.
“For example, one approach is to take advantage of “know-your-customer” software utilities, which store customer due-diligence information in a single repository and allow easy access to bank customer information.
“This may help respondent banks to reply to correspondent banks’ requests in a comprehensive and timely manner. They may also help correspondent banks to identify and mitigate risks.”
But the IMF official noted that one the other hand, global banks should continue to work toward building comprehensive databases and developing technology for universal customer coverage.
He said this will allow them to better monitor transactions and to identify illicit activity. Some governments are also pursuing similar innovations.
“The third issue is information sharing. Durable solutions will likely take a long time. Thus, it is essential to find interim approaches to improve the information flow between correspondent banks and respondent banks, and then make sure the channels are strengthened in the long run.”
Zhang said that there is also a need to tackle legal and contractual obstacles to sharing information across institutions and borders. These include data privacy laws and diverging regulatory frameworks.
“One further option is for banks to make more widespread use of the Legal Entity Identifier to identify corporate customers. The Legal Entity Identifier, or LEI, is designed specifically to help the authorities around the world clearly identify the entities that transact across markets, products and regions, and thus make it easier to recognize trends and risks and take appropriate corrective action.”
The IMF official said that the problems, issues, and solutions can go beyond the three areas he has outlined’ adding “the overarching objective is to safeguard the integrity of financial systems, and at the same time address the unintended consequences of and collateral damages from stronger regulation.
For our part, the IMF is committed to helping you resolve this problem. We can facilitate candid and constructive dialogue among all parties to achieve practical solutions.
“We will continue to encourage standard-setting bodies to take into account the impact of CBR policies—particularly when there are unintended negative consequences like we are discussing now. We will also encourage our member countries to work closely with correspondent banks to promote greater transparency on their exit decisions,” Zhang told the international conference.
- Countries: CARICOM