The International Monetary Fund (IMF) says financial fragilities occasioned by the decrease in the number of correspondent banking relationships (CBRs) could undermine the long-run growth and financial inclusion prospects of countries affected by the withdrawal of CBRs.
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 last July and Antigua and Barbuda’s Prime Minister Gaston Brown, who is spearheading the region’s response, has warned that the Caribbean “must work collectively… to address this threat to our survival”.
AN IMF paper examining the “Recent Trends in Correspondent Banking Relationships –Further Considerations noted that CBRs, which facilitate global trade and economic activity, have been under pressure in several countries.
“So far, cross border payments have remained stable and economic activity has been largely unaffected, despite a recent slight decrease in the number of CBRs. However, in a limited number of countries, financial fragilities have been accentuated as their crossborder flows are concentrated through fewer CBRs or maintained through alternative arrangements.
“These fragilities could undermine affected countries’ long-run growth and financial inclusion prospects by increasing costs of financial services and negatively affecting bank ratings.”
The paper notes that factors leading to global banks’ withdrawal of CBRs are multiple, interrelated, and vary case-by-case.
“They generally reflect correspondent banks’ assessment of the profitability and risk of the relationships. In particular, decisions to terminate CBRs often relate to the correspondent bank’s lack of confidence in the respondent bank’s capacity to effectively manage risk.
“Recent changes in the regulatory and enforcement landscape have contributed to this phenomenon, notably with respect to more rigorous prudential requirements, economic and trade sanctions, anti-money laundering and combating the financing of terrorism (AML/CFT) and tax transparency standards.”.
In addressing the withdrawal of CBRs, the Policy paper noted that this will take time and would require strengthened, coordinated and collective action on the part of public and private stakeholders.
“The first port of call for all countries concerned with the withdrawal of CBRs includes measures to enhance respondent banks’ capacity to manage risks, improve communication between correspondent and respondent banks, strengthen and effectively implement regulatory and supervisory frameworks in line with international standards, particularly for AML/CFT and remove impediments to information sharing.
“Other initiatives to address the underlying drivers of CBR withdrawal, particularly those related to correspondent banks’ profitability and risk assessment concerns, should be considered, though they tend to have more limited impact. In the event of a complete loss of CBRs by all commercial banks in a country, the public sector should also consider the feasibility of temporary mechanisms, including public-backed vehicles, to provide payment clearing services,” it added.
The IMF maintained that it has an important role to play in monitoring risks and advising its membership on policies to help tackle the adverse impacts from the withdrawal of CBRs.
It said that its role has included facilitating dialogue among stakeholders, fostering an enhanced understanding of the phenomenon in the context of surveillance and Financial Sector Assessment Programmes and providing technical assistance and training to help affected countries enhance their monitoring of CBRs and strengthen their legal, regulatory and supervisory frameworks.
The IMF executive directors said that they welcomed the opportunity to discuss the recent trends in, and consequences of, the withdrawal of CBRs and “welcomed the initiatives that are currently being considered or implemented to address CBR withdrawal.
“They underlined the importance of strengthened, coordinated, and collective efforts on the part of public and private stakeholders, and highlighted the important role of the Fund through its surveillance and capacity development activities and its efforts to facilitate international dialogue.”