## wp17209 ## Source details **Canonical URL:** [wp17209](https://www.imf.org/-/media/files/publications/wp/2017/wp17209.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2017/wp17209.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2017/wp17209.pdf.json) --- ### I. Introduction — definition and role of correspondent banking relationships (CBRs) - A correspondent banking relationship (CBR) is a bilateral arrangement between banks, often involving a reciprocal cross-border relationship in multiple currencies. - A correspondent bank provides a deposit account or other liability accounts, and related services, to a respondent bank; the arrangement requires the exchange of messages to settle transactions by crediting and debiting those accounts. - CBRs enable: execution of third-party payments (wire transfers, credit card transactions), trade finance, banks’ own cash clearing, liquidity management and short-term borrowing or investment needs. - Post-global financial crisis, large global banks have reduced involvement in less profitable and riskier activities, including correspondent banking—part of a broader “de-risking” process linked to higher capital requirements, stricter prudential regulations, AML/CFT concerns, sanctions, and increased compliance costs. ### II. Why CBRs matter — channels and regional statistics - Channels through which loss of CBRs can affect Caribbean economies: - International trade and commerce (tourism and services cross-border transactions). - Remittances and money transfer services. - Financial account flows: FDI and other external financing and repatriation of earnings. - Offshore banks: size and linkages to domestic economies. - Regional and comparative statistics (preserved exactly): - Average openness ratio (exports + imports of goods and services divided by GDP) in the Caribbean: 95 percent of GDP over 2011-15. - World average openness ratio: 91 percent of GDP. - Remittances averaged 6.3 percent of GDP in the Caribbean over 2011-15. - World average remittances: 4.8 percent of GDP. - Country remittance examples: Guyana 13 percent of GDP; Haiti nearly 22 percent of GDP; Jamaica 15 percent of GDP. - Average financial account balances in the region: close to 9 percent of GDP over 2011-15. - FDI inflows averaged nearly 8 percent of GDP in 2011-15. - Offshore sector fiscal revenue contributions examples: The Bahamas 0.7 (2015) percent of fiscal revenues; Barbados 4.1 (2013) percent of fiscal revenues. ### III. Illustrative case for Belize — simulation setup and key assumptions - Purpose: use bank-level data to illustrate potential macroeconomic and financial effects of CBR withdrawal in Belize. - Scenarios simulated: - “Low stress” scenario: loss of CBRs reduces the value of cross-border transactions by about 10 percent. - “High stress” scenario: about 70 percent of transactions are eliminated. - Variables examined: exports and imports, FDI, remittances, bank deposits, disposable income, bank balance sheets, changes in banks' net foreign assets (NFA), months of imports coverage, and capital adequacy ratios (CARs). - Source: Central Bank of Belize; IMF staff calculations. ### IV. Belize — key findings (aggregate impacts and summaries) - Aggregate impacts (selected): - Under the high stress scenario, real GDP growth could drop by as much as 5.3 percentage points annually relative to the baseline during 2017-2021. - Trade (value of exports and imports of goods and services) would fall by 23–26 percentage points of GDP during the same period. - Annual FDIs drop by about 1.9-2.5 percentage points of GDP. - The banking system’s CAR would fall by close to 7.5 percentage points but would remain above the prudential minimum of 9 percent; some banks, including the systemic bank, could become insolvent. - Low Stress Scenario — stress impacts relative to baseline (values by year) - Changes in Real GDP (US$ million): 2017 -14.2; 2018 -13.9; 2019 -14.4; 2020 -14.2; 2021 -14.4 - Changes in real GDP growth (percent): 2017 -1.0; 2018 -1.0; 2019 -1.0; 2020 -0.9; 2021 -0.9 - Changes in exports (in percent of GDP): 2017 -3.3; 2018 -3.3; 2019 -3.3; 2020 -3.3; 2021 -3.3 - Changes in imports (in percent of GDP): 2017 -3.7; 2018 -3.6; 2019 -3.5; 2020 -3.5; 2021 -3.5 - Changes in FDI (in percent of GDP): 2017 -0.3; 2018 -0.4; 2019 -0.4; 2020 -0.4; 2021 -0.4 - Changes in bank's NFA (US$ million): 2017 -3.2; 2018 -6.9; 2019 -6.8; 2020 -6.0; 2021 -5.3 - In months of import: 2017 -0.03; 2018 -0.07; 2019 -0.07; 2020 -0.06; 2021 -0.05 - Changes in bank's CARs (percent): 2017 -3.6; 2018 -3.5; 2019 -3.4; 2020 -3.2; 2021 -3.1 - High Stress Scenario — stress impacts relative to baseline (values by year) - Changes in Real GDP (US$ million): 2017 -75.6; 2018 -76.2; 2019 -76.4; 2020 -77.1; 2021 -78.9 - Changes in real GDP growth (percent): 2017 -5.3; 2018 -5.2; 2019 -5.1; 2020 -5.1; 2021 -5.1 - Changes in exports (in percent of GDP): 2017 -23.3; 2018 -23.1; 2019 -22.8; 2020 -22.8; 2021 -22.8 - Changes in imports (in percent of GDP): 2017 -25.7; 2018 -24.9; 2019 -24.6; 2020 -24.6; 2021 -24.6 - Changes in FDI (in percent of GDP): 2017 -1.9; 2018 -2.6; 2019 -2.5; 2020 -2.5; 2021 -2.5 - Changes in bank's NFA (US$ million): 2017 -22.2; 2018 -48.2; 2019 -47.6; 2020 -41.7; 2021 -36.9 - In months of import: 2017 -0.2; 2018 -0.5; 2019 -0.5; 2020 -0.4; 2021 -0.3 - Changes in bank's CARs (percent): 2017 -7.4; 2018 -7.3; 2019 -7.1; 2020 -7.0; 2021 -6.9 ### V. Severity, global and Caribbean developments - Global stylized facts: - Aggregate data show no clear trend in correspondent banking activity; median statistics indicate number of correspondent banks and value of transactions fell during 2012–2015 while volume increased. - Largest declines (by transaction values) observed in advanced economies under stress (Cyprus, Greece), fragile states under sanctions or conflict (Chad, Syria, Ukraine, Yemen), and small island states (Dominica, Timor-Leste, Seychelles). - Limited economic impact thus far in many countries due to alternative arrangements; pressures have accentuated fragilities in some affected countries. - Caribbean-specific developments: - World Bank Survey (2015): Latin America and the Caribbean experienced greater loss of CBRs than many other parts of the world; incidence greater in the Caribbean than in Latin America. - Caribbean Association of Banks (2016) survey: 58 percent of responding banks had lost at least one of their CBRs, directly affecting 12 countries. - IMF (2016) survey: - Only 5 out of 14 countries that responded experienced a decline in the aggregate number of CBRs in the past five years up to September 2016. - Belize lost more than two thirds of its CBRs, with most of the decline from mid–2015 to early 2016. - Smaller indigenous banks have tended to be most affected; foreign-owned branches and subsidiaries have generally not been affected. - Most countries assessed the macroeconomic impact from withdrawal of CBRs (from commercial banks) as either low or moderate. ### VI. Services and sectors most affected in the Caribbean - Bank services reported as adversely affected: - Money transfer services (cash-intensive, numerous small transactions); all countries responding to IMF (2016) survey reported impact on money transfer services. - Foreign currency check clearing; Cash letter deposits; Bank draft settlement; Trade finance; Routing of funds for charities and foundations. - Illustrative examples: - Jamaica: cambios and remittances from some money services businesses affected when a leading bank no longer accepts foreign instruments. - The Bahamas: a bank lost its cash intensive Western Union money transfer business. ### VII. Costs of maintaining correspondent banking services — rising explicit and implicit costs - Explicit costs: correspondent banking fees have increased for some banks in each Caribbean jurisdiction (IMF, 2016). - Implicit costs: more robust due diligence efforts; expenses for improvements in AML/CFT compliance; training of employees. - Examples: - In the ECCU, correspondent banking fees "doubled or tripled on some occasions" (IMF, 2016b). - In Belize, costs for cross–border transactions, particularly wire transfers, "have also increased significantly over time" (CARICOM, 2016). - Transmission to consumers: jurisdictions that noted an increase in explicit correspondent banking fees generally reported significant increases in fees charged to bank customers for wire transfers and foreign currency drafts. - Remittances: available data are patchy and do not suggest any increase in the cost of sending remittances. ### VIII. Termination of services, change in correspondent bank types, and impact on offshore sector - Termination examples: - Belize: banks discontinued processing international wire transfers for credit unions (nesting concerns). - St. Vincent and the Grenadines: foreign-owned banks discontinued deposit services to local credit unions in mid-2016. - ECCU jurisdictions: termination of services to online gaming establishments forced some companies to search for providers in Asia. - Change in type of correspondent banks: - Shift away from major international banks (mainly U.S. origin) toward smaller, less known (“second tier”) banks as replacements. - Belize: some banks established often-restricted relationships with banks in Europe and Asia, or with smaller banks in the US. - Impact on offshore financial sector: - Offshore banks rely on CBRs; declines in CBRs and license applications put future growth at risk. - St. Lucia: several offshore banks experienced termination of CBR relationships; some could not find replacements. - Belize: "13 out of 15 CBR accounts were lost over the last two years" among five offshore banks most affected; offshore banks scaled down operations. - The Bahamas: a 2016 central bank survey revealed that "ten offshore banks had CBRs terminated or restricted, up from just three banks the year before." - IBCs: provision of banking services to IBCs has seen the greatest and most consistent decline across the Caribbean, largely affecting Barbados and the ECCU. ### IX. SWIFT and cross-border transaction trends - SWIFT/BIS indicators show: - Decline in active correspondents accompanied by falling value of cross-border flows in most Caribbean economies. - Volume of transactions increased in the overwhelming majority of jurisdictions (including the Caribbean). - Overall value of transactions declined in most Caribbean economies; average Caribbean decline in value largely comparable to offshore financial centers, Commonwealth of Independent States, and Middle East and Africa. - Declining number of CBRs and increasing transaction volume suggest increasing concentration of relationships and potential financial stability risks. ### X. Factors behind withdrawal of CBRs and AML/CFT as a primary driver - Four main factor groups: - AML/CFT compliance and enforcement (especially in the United States). - Tax transparency agreements and compliance burden. - Trade and economic sanctions exposure. - Profit and risk-related reasons not directly linked to AML/CFT. - AML/CFT channels of exposure for banks: - Shortfalls in supervisory or legal frameworks in respondent banks’ countries. - Uncertainty about the quality of customer due diligence processes of respondent banks. - Presence of relatively higher risk businesses: money/value transfer services, payment settlement services, offshore sectors, gaming. - Caribbean vulnerabilities: - Higher-than-average volume of remittances per capita. - Presence of cash-intensive money transfer services and gaming. - Offshore services sometimes perceived as higher-risk. - Empirical notes: - "No clear relationship between the loss of CBRs and compliance with the 2002 FATF standard in the Caribbean." - Studies find inclusion on high-risk lists reduces payments received but not outgoing payments. - IMF (2017) indicates correspondent banks focus more on the quality of individual relationships with respondent banks than on the country’s AML/CFT framework. - Progress: - FATF 2012 revised standards target effectiveness and a risk-based approach. - At the time of the report, only two countries—"Jamaica and Trinidad and Tobago"—have completed the initial evaluation based on the 2012 FATF recommendations; both assessed with at least "moderate" level of effectiveness in about half of the categories and "low" rating in the other half. ### XI. Tax transparency, sanctions, and lower profitability considerations - Tax transparency pressures (FATCA, OECD regimes, CRS) increase compliance burdens and have contributed to loss of CBRs, notably for offshore financial centers. - Economic and trade sanctions create additional compliance/due diligence requirements; countries under U.S. sanctions have experienced larger declines in CBRs. - Post-crisis lower profitability and increased risk aversion by global banks: regulators require more capital and liquidity; low growth/low interest rates reduce attractiveness of low-return high-compliance lines like correspondent banking. - Small volumes from Caribbean respondent banks reduce correspondent banks’ economies of scale amid escalating compliance costs. ### XII. Empirical relationships and regression findings (selected) - Figure/regression summaries: - Weaker real GDP growth is associated with loss of active CBRs and lower value of CBR transactions. - No clear evidence that size of banking system matters for active CBRs or value of transactions. - Offshore activity (proxy: ratio of BIS bank liabilities to GDP) appears to matter for CBR termination (change in number of active correspondents) but not clearly for value of CBR activity. - Example regression lines and fit statistics from Figure 6: - Change in Number of Active Correspondents vs Real GDP Growth Rate: y = 0.0965x + 3.5402, R² = 0.1332 - Change in Value vs Real GDP Growth Rate: y = 0.0214x + 3.2883, R² = 0.0825 - Change in Number of Active Correspondents vs Log Domestic Banking Assets: y = -0.0093x + 1.2355, R² = 0.0016 - Change in Value vs Log Domestic Banking Assets: y = -0.0051x + 1.2863, R² = 0.0049 - Change in Number of Active Correspondents vs Log (BIS Bank Liabilities/GDP): y = -0.0098x -1.9209, R² = 0.0068 - Change in Value vs Log (BIS Bank Liabilities/GDP): y = -0.0031x -1.8738, R² = 0.0118 - Regression table highlights (selected coefficients and significance) - Observations: 176; R-squared: 0.231, 0.168, 0.129 (for the three columns respectively). - Caribbean: Change in Value = -18.23* (0.0732) - Offshore Financial Center: Change in Value = -3.193 (0.680) - Real GDP growth, 2011-15 avg: Change in CBRs = 0.498*** (0.000840); Change in Volumes = 1.169*** (0.00225); Change in Value = 0.998* (0.0847) - Log (Nominal GDP in USD): Change in Volumes = -1.816** (0.0176) - US Sanctions: Change in CBRs = -7.336*** (0.00872); Change in Value = -24.13** (0.0278) - EU Crisis: Change in CBRs = -20.10*** (2.42e-07); Change in Volumes = -33.29*** (0.000676); Change in Value = -47.60*** (0.00143) - Constant: Change in CBRs = -3.151** (0.0277) - Significance codes: *** p<0.01, ** p<0.05, * p<0.1. - Limitations: regressions explain a relatively small part of changes in CBR activity; respondent bank–specific factors not included. ### XIII. Policy response, regional action, and recommendations - Regional action: - CARICOM established a task force to study the “de-risking” phenomenon and to engage with international financial institutions and advanced-country regulators. - Initiatives to address drivers related to risk or perceptions: - Prioritize meeting international AML/CFT and tax transparency standards, including the 2012 FATF standards and OECD’s Common Reporting Standards. - ECCU example: consolidation of national AML/CFT supervision into one regional operation at the ECCB. - Explore a regional information repository to share suspicious transaction flows among regional financial intelligence units. - More outreach by home authorities of global banks to clarify regulatory expectations. - Improve information sharing and communication between respondent and correspondent banks; ensure no legal barriers prevent cross-border information sharing. - Improve the quality of payment messages (adopt SWIFT, increase mandatory information in SWIFT messages, pursue KYC utilities, standardized legal entity identifiers). - Develop special protocols for higher-risk legitimate activities (gaming, offshore business, money transfer services, charities, citizenship-by-investment). - Encourage digitization of payments to replace cash for improved traceability. - Consider respondent banks obtaining or purchasing U.S. banks or use of central bank’s CBRs on behalf of commercial clients as short-term/emergency measures. - Initiatives to address drivers related to profitability: - Consolidate transactional traffic to exploit economies of scale (coordinate among respondent banks; down-streaming; bundle services). - Consolidation/merger of small respondent banks to increase volume and enable IT/risk investments (ECCU promotion). - Risk-based pricing (higher fees) recognized but may harm competitiveness and financial inclusion. - Explore technological innovations (Fintech, blockchain) with oversight frameworks. - Consider public subsidies for compliance costs or customer fees for remittances/charities/SMEs, acknowledging risks of distortion and budget constraints. - Establish CBRs with smaller second- or third-tier U.S. banks as alternatives. - Recommended multilateral and domestic actions: - Home authorities of global banks should proactively communicate regulatory expectations. - International standard setters should consider unintended consequences on developing countries when strengthening financial resilience. - Affected countries should strengthen regulatory and supervisory frameworks, including AML/CFT, with technical assistance as needed. - Respondent banks should proactively engage correspondent banks on customer due diligence, transaction monitoring, and AML/CFT frameworks. - Correspondent banks should be more forthcoming about expectations; industry initiatives should facilitate enhanced customer due diligence and reduce compliance costs. - Small respondent banks should explore mergers or collaborations. - In severe CBR loss scenarios, consider temporary emergency public mechanisms (central bank use of its CBRs). - IMF action: - The Fund launched a Caribbean CBR initiative providing technical assistance in AML/CFT and forums with correspondent and respondent banks to pursue actionable policies (improving communication and information sharing; consolidating transactions; addressing gaps in risk management). ### XIV. Belize — observed impacts, factors, and policy recommendations (detailed) - Observed impacts and facts (Belize, 2015–early 2016): - Major global banks terminated some 22 CBR accounts (71 percent) in 9 banks out of 31 total accounts in the banking system. - The largest indigenous bank lost all its CBRs; a Canadian-owned bank that accounts for 19 percent of system’s assets did not lose any of its own. - Central Bank of Belize (CBB) lost two of its five CBRs, including one used to temporarily process selected wires for commercial banks that lost their CBRs. - Certain sectors seriously affected: local banks closed accounts of money transfer business clients; banks stopped processing credit union member wire transfers citing 'nesting' concerns. - Transaction costs and delays: cost of wire transfers increased three-fold in one bank; processing times increased from “within twenty-four hours” to “several days.” - Offshore banks’ deposits declined by more than 20 percent in 12 months to March 2016. - Present situation: all affected banks have CBRs but most are wire transfer arrangements with less-known banks and non–bank service providers; every bank has at least two CBRs but many rely on the same correspondent bank. - Cross-border financial transactions were not disrupted as initially feared due to CBB support and major credit card companies (some raised credit limits). - Macroeconomic manifestations: restricted access to financial services for certain customers and business lines; delays in international payments; higher transaction costs; higher cost for due diligence; delays in settlement of remittances. - Factors behind CBR withdrawal in Belize: - Concerns related to enforcement of global regulatory standards such as AML/CFT and prudential regulations. - Belize recently exited from the CFATF follow-up and monitoring process, indicating progress on AML/CFT. - Major U.S. correspondent bank continues relations with CBB and one commercial bank, despite closing accounts of other banks; termination notices often did not provide specific reasons. - Money laundering and terrorist financing risks linked to misuse of legal persons and arrangements; IFSC complexities in beneficial ownership transparency. - Belize policy response and recommendations: - CBB actions: temporarily processed affected banks’ cash documents and limited wire transfers using its own CBR account with a U.S. bank; met with the major U.S. bank that terminated many CBRs; met with U.S. officials to attempt to secure replacement CBRs. - Some local banks considered acquiring small US-licensed banks. - Recommended actions: - Further strengthen effectiveness of AML/CFT framework and enhance entity transparency, especially in the offshore sector. - Continue dialogue with the US Treasury (UST) which conducted a preliminary assessment of TA needs. - Stronger focus on risk-based supervision of banks and imposing corrective actions and sanctions, when relevant. - IFSC’s registered agents and service providers should be subject to proper licensing requirements and be monitored for compliance with AML/CFT requirements on a risk basis. - Develop mechanisms (e.g., public registry for beneficial ownership) to allow timely access to adequate, accurate, and current information on beneficial ownership of all types of entities created in Belize. - Entities’ registers should immediately publish basic information related to entities created in Belize with severe sanctions for noncompliance. _Extracted from: ANNEX 1 and related sections of "wp17209" (IMF working paper annex and associated analysis)._ ### ANNEX 1. MACROECONOMIC IMPLICATIONS OF A CONTINUED LOSS OF CBRS: AN ### ANNEX 1. MACROECONOMIC IMPLICATIONS OF A CONTINUED LOSS OF CBRS: AN ILLUSTRATIVE CASE FOR BELIZE ### I. Introduction: definition and role of correspondent banking relationships (CBRs) - A correspondent banking relationship (CBR) is a bilateral arrangement between banks, often involving a reciprocal cross-border relationship in multiple currencies. - A correspondent bank provides a deposit account or other liability accounts, and related services, to a respondent bank; the arrangement requires the exchange of messages to settle transactions by crediting and debiting those accounts. - CBRs enable: execution of third-party payments (wire transfers, credit card transactions), trade finance, banks’ own cash clearing, liquidity management and short-term borrowing or investment needs. - Post-global financial crisis, large global banks have reduced involvement in less profitable and riskier activities, including correspondent banking—part of a broader “de-risking” process linked to higher capital requirements, stricter prudential regulations, AML/CFT concerns, sanctions, and increased compliance costs. ### II. Why CBRs matter: channels and regional statistics - Channels through which loss of CBRs can affect Caribbean economies: - International trade and commerce: cross-border transactions for tourism and services depend on functioning CBRs. - Remittances: channels for migrant remittances and money transfer services. - Financial account flows: FDI and other external financing/repatriation of earnings. - Offshore banks: size and linkages of offshore sectors to domestic economies can transmit risks. - Regional and comparative statistics (preserve numeric values exactly): - Average openness ratio (exports + imports of goods and services divided by GDP) in the Caribbean: 95 percent of GDP over 2011-15. - World average openness ratio: 91 percent of GDP. - Remittances averaged 6.3 percent of GDP in the Caribbean over 2011-15. - World average remittances: 4.8 percent of GDP. - Country remittance examples: Guyana 13 percent of GDP; Haiti nearly 22 percent of GDP; Jamaica 15 percent of GDP. - Average financial account balances in the region: close to 9 percent of GDP over 2011-15. - FDI inflows averaged nearly 8 percent of GDP in 2011-15. - Offshore sector fiscal revenue contributions examples: The Bahamas 0.7 (2015) percent of fiscal revenues; Barbados 4.1 (2013) percent of fiscal revenues. ### III. Illustrative case for Belize (Box 1): simulation setup and key assumptions - Purpose: use bank-level data to illustrate potential macroeconomic and financial effects of CBR withdrawal in Belize. - Scenarios simulated: - “Low stress” scenario: loss of CBRs reduces the value of cross-border transactions by about 10 percent. - “High stress” scenario: about 70 percent of transactions are eliminated. - Variables examined: exports and imports, FDI, remittances, bank deposits, disposable income, bank balance sheets, changes in banks' net foreign assets (NFA), months of imports coverage, and capital adequacy ratios (CARs). - Source: Central Bank of Belize; IMF staff calculations. ### IV. Belize: key findings (summary) - Aggregate impacts (selected): - Under the high stress scenario, real GDP growth could drop by as much as 5.3 percentage points annually relative to the baseline during 2017-2021. - Trade (value of exports and imports of goods and services) would fall by 23–26 percentage points of GDP during the same period. - Annual FDIs drop by about 1.9-2.5 percentage points of GDP. - The banking system’s CAR would fall by close to 7.5 percentage points but would remain above the prudential minimum of 9 percent; some banks, including the systemic bank, could become insolvent. - Low Stress Scenario: Stress impacts relative to baseline (values by year) - Changes in Real GDP (US$ million): 2017 -14.2; 2018 -13.9; 2019 -14.4; 2020 -14.2; 2021 -14.4 - Changes in real GDP growth (percent): 2017 -1.0; 2018 -1.0; 2019 -1.0; 2020 -0.9; 2021 -0.9 - Changes in exports (in percent of GDP): 2017 -3.3; 2018 -3.3; 2019 -3.3; 2020 -3.3; 2021 -3.3 - Changes in imports (in percent of GDP): 2017 -3.7; 2018 -3.6; 2019 -3.5; 2020 -3.5; 2021 -3.5 - Changes in FDI (in percent of GDP): 2017 -0.3; 2018 -0.4; 2019 -0.4; 2020 -0.4; 2021 -0.4 - Changes in bank's NFA (US$ million): 2017 -3.2; 2018 -6.9; 2019 -6.8; 2020 -6.0; 2021 -5.3 - In months of import: 2017 -0.03; 2018 -0.07; 2019 -0.07; 2020 -0.06; 2021 -0.05 - Changes in bank's CARs (percent): 2017 -3.6; 2018 -3.5; 2019 -3.4; 2020 -3.2; 2021 -3.1 - High Stress Scenario: Stress impacts relative to baseline (values by year) - Changes in Real GDP (US$ million): 2017 -75.6; 2018 -76.2; 2019 -76.4; 2020 -77.1; 2021 -78.9 - Changes in real GDP growth (percent): 2017 -5.3; 2018 -5.2; 2019 -5.1; 2020 -5.1; 2021 -5.1 - Changes in exports (in percent of GDP): 2017 -23.3; 2018 -23.1; 2019 -22.8; 2020 -22.8; 2021 -22.8 - Changes in imports (in percent of GDP): 2017 -25.7; 2018 -24.9; 2019 -24.6; 2020 -24.6; 2021 -24.6 - Changes in FDI (in percent of GDP): 2017 -1.9; 2018 -2.6; 2019 -2.5; 2020 -2.5; 2021 -2.5 - Changes in bank's NFA (US$ million): 2017 -22.2; 2018 -48.2; 2019 -47.6; 2020 -41.7; 2021 -36.9 - In months of import: 2017 -0.2; 2018 -0.5; 2019 -0.5; 2020 -0.4; 2021 -0.3 - Changes in bank's CARs (percent): 2017 -7.4; 2018 -7.3; 2019 -7.1; 2020 -7.0; 2021 -6.9 ### V. The withdrawal of CBRs — severity, global and Caribbean developments - Global stylized facts (survey and SWIFT-based evidence): - Aggregate data on volumes and values of transactions show no clear trend in correspondent banking activity, though median statistics indicate the number of correspondent banks and the value of transactions fell during 2012–2015 while the volume of transactions increased. - Largest declines in CBRs (by transaction values) observed in: advanced economies under stress (Cyprus, Greece), fragile states under sanctions or conflict (Chad, Syria, Ukraine, Yemen), and small island states (Dominica, Timor-Leste, Seychelles). - Limited economic impact thus far in many countries because financial institutions often find alternative arrangements; however, pressures have accentuated financial fragilities in some affected countries. - Caribbean-specific developments: - The World Bank Survey (2015) suggests Latin America and the Caribbean experienced a greater loss of CBRs than many other parts of the world, with incidence of withdrawals greater in the Caribbean than in Latin America. - Caribbean Association of Banks (2016) survey: 58 percent of the banks that responded had lost at least one of their CBRs, directly affecting 12 countries. - IMF (2016) survey results: - Only 5 out of 14 countries that responded experienced a decline in the aggregate number of CBRs in the past five years up to September 2016. - Belize lost more than two thirds of its CBRs, with most of the decline from mid–2015 to early 2016. - Smaller indigenous banks have tended to be most affected; foreign-owned branches and subsidiaries have generally not been affected. - Most countries assessed the macroeconomic impact from withdrawal of CBRs (from commercial banks) as either low or moderate. ### VI. Services and operations most affected in the Caribbean - Bank services reported as adversely affected: - Money transfer services (cash-intensive, numerous small transactions); all countries responding to IMF (2016) survey reported impact on money transfer services. - Foreign currency check clearing. - Cash letter deposits. - Bank draft settlement. - Trade finance. - Routing of funds for charities and foundations. - Illustrative country examples: - Jamaica: cambios and remittances from some money services businesses affected when a leading bank no longer accepts foreign instruments. - The Bahamas: a bank lost its cash intensive Western Union money transfer business. *Source: Excerpts from IMF working paper annex: "ANNEX 1. MACROECONOMIC IMPLICATIONS OF A CONTINUED LOSS OF CBRS: AN ILLUSTRATIVE CASE FOR BELIZE" (IMF staff and surveys cited within).* ### 9. Costs of maintaining correspondent banking services have risen substantially in ### 9. Costs of maintaining correspondent banking services have risen substantially in some cases ### Rising explicit and implicit costs - Explicit costs: correspondent banking fees have increased for some banks in each Caribbean jurisdiction (IMF, 2016). - Implicit costs: more robust due diligence efforts; expenses for improvements in AML/CFT compliance; training of employees. - Example: In the ECCU, correspondent banking fees "doubled or tripled on some occasions" (IMF, 2016b). - Example: In Belize, costs for cross–border transactions, particularly wire transfers, "have also increased significantly over time" (CARICOM, 2016). - Transmission to consumers: jurisdictions that noted an increase in explicit correspondent banking fees generally reported significant increases in fees charged to bank customers for wire transfers and foreign currency drafts. - Remittances: available data do not definitively point to an increase in the cost of inbound remittances; available data on the cost of remittances are patchy and do not suggest any increase in the cost of sending remittances. ### Termination of services and affected sectors - Banks have terminated relations with clients from certain sectors perceived as higher risk; notable examples: - Belize: banks discontinued processing international wire transfers for credit unions (nesting concerns). - St. Vincent and the Grenadines: foreign-owned banks discontinued deposit services to local credit unions in mid-2016, consolidating credit unions’ deposits in an indigenous bank. - ECCU jurisdictions: termination of banking services to online gaming establishments forced some companies to search for banking services providers in Asia. - Sectors negatively impacted (reported in IMF, 2016 survey): gambling and gaming sectors in The Bahamas, Suriname and Trinidad and Tobago. - Anecdotal evidence: increased scrutiny or refusals to accept deposits associated with citizenship programs in some ECCU jurisdictions. ### Change in type of correspondent banks - Shift away from major international banks (mainly U.S. origin) toward smaller, less known (“second tier”) banks as replacements. - Belize: some banks established often-restricted relationships with banks in Europe and Asia, or with smaller banks in the US. ### Impact on offshore financial sector - Offshore banks rely on CBRs for core business; declines in CBRs and resulting declines in license applications have put future growth of the offshore sector at risk. - Country-specific impacts: - St. Lucia: several offshore banks experienced termination of CBR relationships; some could not find replacements; some newly licensed offshore banks were unable to commence operations or surrendered licenses largely due to inability to establish CBRs (Annex II). - Belize: "13 out of 15 CBR accounts were lost over the last two years" among five offshore banks most affected; offshore banks scaled down operations; domestic banks now play a greater role. - The Bahamas: a 2016 central bank survey revealed that "ten offshore banks had CBRs terminated or restricted, up from just three banks the year before." - International Business Companies (IBCs): provision of banking services to IBCs has seen the greatest and most consistent decline across the Caribbean, largely affecting Barbados and the ECCU; in Barbados, banks have terminated relationships with some corporate vehicles in the International Business and Financial Services sector, leading to closing of business lines, termination of services, or arduous restrictions on IBC accounts. ### Cross-border transaction trends (SWIFT data) - Evidence suggests the number of active correspondents has declined in the majority of Caribbean jurisdictions. - SWIFT data (reported in BIS, 2016) for a sample of "204 economies" include estimates of changes between 2015 and 2011 (in percent) in the number of active correspondents, volume, and value of SWIFT transactions. - Key patterns from available SWIFT indicators: - Decline in active correspondents was accompanied by falling value of cross-border flows in most Caribbean economies. - The volume of transactions increased in the overwhelming majority of jurisdictions (including the Caribbean), albeit with heterogeneity. - Overall value of transactions declined in most Caribbean economies; the average Caribbean decline in the value of SWIFT transactions is largely comparable to offshore financial centers, Commonwealth of Independent States, and Middle East and Africa. - The combination of declining number of CBRs and increasing transaction volume suggests increasing concentration of relationships, potentially increasing financial stability risks from further withdrawal of CBRs. ### Factors behind withdrawal of CBRs - Global banks reassessed business models due to macroeconomic and regulatory changes; persistently low interest rates post-Global Financial Crisis and changes in regulatory frameworks reduced attractiveness of high-volume, low-return lines like correspondent banking. - Four main groups of factors contributing to decisions to end CBRs: - Compliance issues related to AML/CFT regulations and more aggressive enforcement by regulators (especially in the United States). - Tax transparency agreements imposing additional regulatory burdens and compliance costs. - Trade and economic sanction violations exposing banks to very large fines and additional due diligence requirements. - Profit and risk-related reasons not directly linked to AML/CFT compliance, reflecting broader shifts in the banking landscape since the global financial crisis. - These factors are not mutually exclusive; any single factor can be sufficient to trigger termination of a CBR. ### AML/CFT as a primary driver; country vulnerabilities and evidence - AML/CFT compliance-related issues are the most widely referenced reason for withdrawal of CBRs. - FATF revised standards in 2012 to focus on effectiveness and a risk-based approach; compliance costs associated with due diligence plus large fines and reputational damage are primary reasons given for withdrawing CBRs. - Channels of AML/CFT exposure identified by banks: - Shortfalls in supervisory or legal frameworks in respondent banks’ countries. - Uncertainty about the quality of customer due diligence processes of respondent banks. - Presence of relatively higher risk businesses: money or value transfer services, payment settlement services, offshore sectors, gaming—especially those lacking physical presence. - Caribbean characteristics increasing vulnerability to AML/CFT perceptions: - Higher-than-average volume of remittances per capita in many Caribbean countries. - Presence of money or value transfer services with large numbers of cash transactions (small amounts per transaction), complicating due diligence. - Cash-intensive casino operations and/or on-line gambling in several jurisdictions; regulation and supervision of money/value transfer services and gaming may be less established than for banking. - Presence of offshore services, sometimes perceived as higher-risk. - Empirical findings: - Available evidence reveals "no clear relationship between the loss of CBRs and compliance with the 2002 FATF standard in the Caribbean." - Studies (Collin, Cook and Soramaki, 2016) find that inclusion on a list of high risk countries reduces the number of payments received but has no impact on outgoing payments. - IMF (2017) indicates correspondent banks focus more on the quality of individual relationships with respondent banks than on the country’s AML/CFT framework. ### Progress on AML/CFT assessments - Caribbean countries have made significant progress since initial assessments. - FATF 2012 revised standards aim to assess effectiveness with a risk-based approach. - At the time of the report, only two countries—"Jamaica and Trinidad and Tobago"—have completed the initial evaluation based on the 2012 FATF recommendations. - Both countries were assessed with at least "moderate" level of effectiveness in about half of the categories and "low" rating in the other half. ### Tax transparency pressures - Increased global pressure to enhance tax transparency has contributed to loss of CBRs, especially for jurisdictions with offshore financial service centers that relied on zero or low tax rates to attract business. - Noncompliance with tax transparency regimes (for example, the United States’ FATCA) can have serious consequences for countries doing business with U.S. firms. - Compliance with tax information agreements (FATCA, OECD’s tax information exchange agreement, and Common Reporting Standard) imposes additional regulatory burden that increases compliance and transaction costs, as well as potential fines and reputational risks—reducing global banks’ appetite to deal with offshore financial institutions. *Source: wp17209 - 9. Costs of maintaining correspondent banking services have risen substantially in some cases (IMF).* ### 21. Several Caribbean jurisdictions have or are in the process of entering agreements ### wp17209 - 21. Several Caribbean jurisdictions have or are in the process of entering agreements ### Tax information sharing and CRS implementation - Most Caribbean countries are already implementing FATCA or are moving towards FATCA compliance (Table 2). - OECD Global Forum assesses jurisdictions by three criteria: (i) compliance with the standard for exchange of information on request (EOIR); (ii) commitment to implement the Common Reporting Standard (CRS) on automatic exchange of information; and (iii) participation in the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. - Many Caribbean countries comply with at least two out of the three criteria and many have agreed to a multilateral agreement on tax information sharing and are committed to the CRS, which standardizes financial account information to be shared and implements an automatic exchange of information technology (Table 2). - Implementation status and timing: - Implementation of the CRS is at an early stage, requires significant effort in terms of both domestic legislation and international negotiations, and is not expected to be completed before 2018. - Jurisdiction-specific commitments listed include entries such as "Committed to First Exchange Under CRS" as of 19 September 2016 and various Multilateral (MCAA) or Bilateral Exchange Agreement statuses (see Table 2 entries such as "2017MCAAPC", "2018MCAALC", "2017MCAALC", "2018BilateralPC", "2017Bilateral NC"). - Note: NC = non-compliant; PC = partially compliant; LC = largely compliant; C = compliant. ### International sanctions and due diligence - Economic and trade sanctions create additional compliance and due diligence requirements for banks, similar to AML/CFT violations, potentially leading to expensive fines and higher costs of maintaining correspondent banking relationships (CBRs). - Evidence shows countries facing U.S. economic and trade sanctions have experienced larger declines in CBRs and in the volume and value of CBR transactions. - For Caribbean countries: - Direct impact from such sanctions is unlikely to be a major driver of CBR withdrawals in the region. - Indirect effects matter because offshore banks in the region facilitate international transactions from all over the world and citizenship-by-investment programs receive applicants from around the world, including from countries subject to sanctions. ### Lower profitability and increased risk aversion by global banks - Post-global financial crisis dynamics: - Banks have re-examined business practices for exposure to risk; consolidation in the banking sector has occurred, particularly in the United States and Europe. - Regulators have required banks to hold more capital and more liquid assets, increasing the cost of holding risk. - The low growth, low interest rate environment has prompted banks to become leaner and more risk averse and to concentrate on higher profits and core business, leading withdrawals of CBRs from jurisdictions with low volumes or regulatory shortfalls (Erbenova et al., 2016). - Small volumes from Caribbean respondent banks reduce attractiveness to correspondent banks due to limited economies of scale amid escalating regulatory compliance costs. - In smaller or less developed financial systems, fewer opportunities exist for “bundling” less profitable CBR activities with other financial services that generate profits. - The report notes there is no statistical evidence that the size of the country or the domestic banking sector matters for CBR loss (Figure 6), though stronger economic activity is associated with increases in the number of CBRs and in the value of CBR transactions. ### Empirical relationships: growth, size, offshore activity and CBRs (Figure 6 summary) - Weaker real GDP growth is associated with loss of active CBRs and with lower value of CBR transactions. - No clear evidence that size of the banking system (log domestic banking assets) matters for active CBRs or for the value of transactions. - Offshore activity, proxied by the ratio of BIS bank liabilities to GDP, appears to matter for CBR termination (change in number of active correspondents) but does not have a clear relation with the value of CBR activity. - Regression lines and fit statistics shown (selected examples from Figure 6): - Change in Number of Active Correspondents vs Real GDP Growth Rate: y = 0.0965x + 3.5402, R² = 0.1332 - Change in Value vs Real GDP Growth Rate: y = 0.0214x + 3.2883, R² = 0.0825 - Change in Number of Active Correspondents vs Log Domestic Banking Assets: y = -0.0093x + 1.2355, R² = 0.0016 - Change in Value vs Log Domestic Banking Assets: y = -0.0051x + 1.2863, R² = 0.0049 - Change in Number of Active Correspondents vs Log (BIS Bank Liabilities/GDP): y = -0.0098x -1.9209, R² = 0.0068 - Change in Value vs Log (BIS Bank Liabilities/GDP): y = -0.0031x -1.8738, R² = 0.0118 - Note: Blue dots in the charts represent Caribbean countries. Offshore banking sector size is proxied by the BIS bank liabilities. ### Regression analysis of drivers of CBR withdrawal (paragraph summary) - Data and methodology: - Regressions use BIS (2016) data on percent changes in the number of CBRs, values of transactions, and number of transactions as dependent variables. - Explanatory variables proxy for potential country-level drivers. - Key regression findings: - Size and growth: - Log of nominal GDP (proxy for size) has the expected positive sign (but not statistically significant) for change in active CBRs and change in value of transactions. - Log of nominal GDP is significant and negatively correlated with change in volume of transactions. - Economic expansion (growth) is significantly correlated with growth in the number of active correspondents; values and volumes of transactions are also positively correlated with growth. - Other determinants: - U.S. economic and trade sanctions are an important determinant of changes in CBR activity. - The EU crisis indicator variable is highly significant with large negative estimates for all three dependent variables. - A significant negative estimate for the constant term in the regression modeling changes in active CBRs suggests part of the decline may be a general phenomenon not captured by the model. - Caribbean-specific effects: - Controlling for several determinants, the Caribbean dummy variable has the expected negative (albeit not always statistically significant) coefficients, suggesting a more pronounced decline of CBR activity in the Caribbean for reasons not captured by other explanatory variables. - Negative signs are observed for changes in values and volumes for offshore financial centers as expected. - Overall: Statistically significant correlations exist between CBR loss and potential drivers, but these drivers explain a relatively small part of the change in CBR activity (Table 3 and Annex III). ### Policy response and regional action - The loss of CBRs has generated great concern throughout the Caribbean. - At the regional level, via CARICOM, Caribbean policy makers have established a task force to study the “de-risking” phenomenon and have made it a key aspect of their engagement and dialogue with international financial institutions and advanced-country financial regulators and political leaders. *Source: wp17209 - 21. Several Caribbean jurisdictions have or are in the process of entering agreements (IMF).* ### 27. Given the various drivers, there is no “silver bullet” to solve the problem of ### wp17209 - 27. Given the various drivers, there is no “silver bullet” to solve the problem of ### Key empirical findings - Regression results (IMF staff estimates and calculations; p-val in parentheses). Observations: 176; R-squared: 0.231, 0.168, 0.129 (for the three columns respectively). - Variables and coefficients (standard errors / p-val in parentheses where present): - Caribbean: Change in CBRs = -0.439 (0.865); Change in Volumes = -5.982 (0.367); Change in Value = -18.23* (0.0732) - Offshore Financial Center: Change in CBRs = 1.013 (0.607); Change in Volumes = -6.320 (0.213); Change in Value = -3.193 (0.680) - Real GDP growth, 2011-15 avg: Change in CBRs = 0.498*** (0.000840); Change in Volumes = 1.169*** (0.00225); Change in Value = 0.998* (0.0847) - Log (Nominal GDP in USD): Change in CBRs = 0.0935 (0.751); Change in Volumes = -1.816** (0.0176); Change in Value = 0.812 (0.484) - US Sanctions: Change in CBRs = -7.336*** (0.00872); Change in Volumes = -6.605 (0.355); Change in Value = -24.13** (0.0278) - EU Crisis: Change in CBRs = -20.10*** (2.42e-07); Change in Volumes = -33.29*** (0.000676); Change in Value = -47.60*** (0.00143) - Constant: Change in CBRs = -3.151** (0.0277); Change in Volumes = 20.31*** (1.03e-07); Change in Value = 1.341 (0.810) - Significance codes: *** p<0.01, ** p<0.05, * p<0.1. - Observed patterns and impacts: - The number of correspondent banking relationships (CBRs) and the value of CBR transactions have fallen in several Caribbean countries. - Services and sectors particularly affected include international wire transfers, offshore financial services, and gaming. - Evidence suggests reductions in CBR activity are more pronounced in countries that are offshore financial centers. - There is little support in the available data that the size of the economy or the banking system is an important driver; bank size could be important. - Stress-scenario modeling using bank-level data in Belize indicates potential GDP impacts from further CBR loss: a reduction in real economic activity ranging from 1 percent of GDP in a low stress scenario up to 6 percent in a high stress scenario. ### Initiatives to address drivers related to risk or risk perceptions - Ensure compliance with international standards: - Prioritize meeting international AML/CFT and tax transparency standards, including compliance with the 2012 FATF standards and the OECD’s Common Reporting Standards. - Example: ECCU consolidation of national AML/CFT supervision into one regional operation at the ECCB. - Explore a regional information repository to share suspicious transaction flows among regional financial intelligence units. - Clarity by regulators of expectations of global banks: - More outreach by regulators recommended; home authorities of global banks should clarify regulatory expectations. - Note: a U.S. Department of the Treasury fact sheet cited that 95 percent of AML/CFT-related violations are corrected without penalties, and large fines were imposed where failures persisted for over 5 years. - FATF revised guidance clarified that “know your customer’s customer (KYCC)” is not required as an obligatory part of correspondent banks’ customer due diligence. - Improve information sharing and communication between respondent and correspondent banks: - Enhanced communication can allow clarification of risk tolerance and reasons for termination and permit respondent banks to show remedial steps taken. - Examples of positive practices: close engagement by some correspondent banks; respondent banks investing in automated transaction-monitoring IT systems. - Ensure no legal barriers prevent cross-border information sharing. - Improve the quality of payment messages: - Adoption of SWIFT by commercial banks regulated by the ECCB. - Establish guidelines to increase mandatory information in SWIFT messages. - Pursue KYC utilities for shared customer information and promote standardized legal entity identifiers. - Special protocols for higher-risk activities by respondent banks: - Develop special protocols, in consultation with correspondent banks, for customer due diligence in higher-risk but legitimate sectors (e.g., gaming, offshore business, money transfer services, charities, citizenship-by-investment). - Longer-term: replace cash with digitized payments for commercial transactions to facilitate tracing funds. - Purchase/establish a bank in the U.S.: - Respondent banks individually or collectively might obtain their own U.S. bank to maintain CBRs; this would not remove KYC and enforcement risks. - Establishing a US Federal Reserve approved, US dollar clearing facility is lengthy, complex, and costly; purchasing an existing commercial bank may be more practical. - Anecdote: at least one Caribbean bank reportedly received a U.S. license; another started the application process. - Use the central bank’s CBRs on behalf of commercial bank clients: - A short-term/emergency measure (used in the case of Belize) but requires assessment of legal/operational feasibility and central bank risk mitigation. ### Initiatives to address drivers related to profitability - Consolidate transactional traffic to exploit economies of scale: - Coordinate among respondent banks to concentrate CBRs with fewer correspondent banks. - Down-streaming: correspondent bank uses an intermediary bank with transparent flow of customer/transaction information. - Bundle correspondent banking services with other products (credit card clearing, letters of credit, wealth management) to spread compliance costs. - Consolidation/merger of small respondent banks to increase volume and enable investment in IT and risk management; ECCU is promoting this solution. - Increase fees charged by correspondent banks: - Risk-based pricing could factor compliance costs; higher fees have occurred and some costs have been passed to customers. - Higher transaction costs can harm competitiveness and financial inclusion and have limited long-term scope. - Explore technological innovations: - Emerging Fintech (e.g., blockchain) could reduce transfer costs, improve risk management and transparency, and shorten settlement times; these are longer-term and require oversight frameworks. - Subsidize compliance costs: - Public sector subsidies for compliance costs or customer fees might be necessary to sustain remittances or access for charities and SMEs, but risks market distortions, budget constraints, and challenges in defining target categories. - Establish CBRs with smaller second- or third-tier U.S. banks: - Smaller U.S. banks may find correspondent services to Caribbean banks more commercially significant; fees likely higher but relationships may be more sustainable. - Caribbean banks have had some success establishing new CBRs with smaller correspondent banks, with potential reputational or efficiency trade-offs. ### Conclusion and policy recommendations - No single solution exists; coordinated efforts by multiple stakeholders are required to mitigate financial exclusion risks and potential negative impacts on financial stability. - Recommended actions: - Home authorities of global banks should proactively communicate regulatory expectations. - International standard setters should consider unintended consequences on developing countries when strengthening international financial resilience. - Affected countries should strengthen regulatory and supervisory frameworks, including AML/CFT, with technical assistance as needed. - Respondent banks should proactively engage correspondent banks on customer due diligence, transaction monitoring, and AML/CFT frameworks. - Correspondent banks should be more forthcoming about expectations; industry initiatives should facilitate enhanced customer due diligence and reduce compliance costs. - Small respondent banks should explore mergers or collaborations to generate more transaction volume and improve risk management. - In severe CBR loss scenarios, consider temporary emergency public mechanisms, such as central bank use of its CBRs to avoid disruption of crucial cross-border transactions. - IMF action: the Fund launched a Caribbean CBR initiative providing technical assistance in AML/CFT and forums with correspondent and respondent banks to pursue actionable policies (improving communication and information sharing; consolidating transactions; addressing gaps in risk management). *Source: IMF staff estimates, calculations and analysis as presented in the provided content.* ### ANNEX 1. MACROECONOMIC IMPLICATIONS OF A CONTINUED LOSS OF CBRS: AN ### ANNEX 1. MACROECONOMIC IMPLICATIONS OF A CONTINUED LOSS OF CBRS: AN ILLUSTRATIVE CASE FOR BELIZE ### Theoretical framework - Loss of CBR affects the economy through multiple channels: disruptions in external trade and finance via banks affected by loss of CBRs, direct effects on local businesses that escape the financial system, and second-round knock-on effects via local linkages among sectors. - Four channels isolated for small open Caribbean economies: international trade, remittances, financial flows, and banks’ balance sheets. - Analysis examines changes in: exports, imports, FDI, remittances, bank deposits, disposable income, and banks’ balance sheets, reflecting inability to send or receive foreign payments. ### Estimation methodology - Impact on banks’ capital = sum of income changes due to reduced ability to process wire transfers or sell foreign exchange + specific provisions for new NPLs caused by borrowers' inability to wire loan payments or reduced revenue. - Impact on maximum lending capacity = impact on bank’s capital divided by the minimum capital adequacy ratio (CAR). - Impact on NFAs = sum of changes in exports, imports, deposit and FDI changes due to investors’ inability to wire funds into or out of the country. - Impact on nominal GDP: - Estimate contributions to nominal GDP of one (nominal) unit of bank credit, exports, imports, remittance inflows, remittance outflows, and FDI using prior econometric studies. - Multiply those coefficients by assumed changes in exports, remittance inflows, remittance outflows, imports, bank credit, and FDI in the CBR stress scenarios. - Change in bank credit is assumed equal to the change in maximum lending capacity. - Impact on real GDP = ratio of impact on nominal GDP to the GDP deflator, with the GDP deflator assumed unaffected by loss of CBRs. ### Scenarios examined - Baseline scenario: - No impact from loss of CBRs. - Banks with CBRs with full banking services and wire transfer arrangements assumed to continue in baseline. - CBB continues to step in to facilitate flow of foreign exchange between banks and partly correct uneven distribution of foreign exchange. - Low CBR stress scenario: - Only banks that currently have CBRs with full banking services and one with wire arrangement continue to process wire transfers. - These banks will only process 90 percent of transactions affected by CBR losses in other banks. - Other banks can only process credit card transactions through accounts with credit card networks or restricted accounts such as brokerage accounts. - CBB will not be able to facilitate flows of foreign exchange between banks. - Lower financial transactions are assumed associated with lower economic activity in the same proportions (example: 90 percent processing → exports at 90 percent of baseline). - High CBR stress scenario: - Similar to low stress scenario but banks with CBRs with full banking services and some with wire arrangements will only process 30 percent of the transactions affected by CBR losses. ### Quantitative illustrative results (Low CBR stress scenario) - Real GDP: could drop by about 1 percentage point every year relative to the baseline during 2017-2021. - Annual exports of banks’ customers: drop by about 3.2 percentage points of GDP during 2017-2021. - Annual imports of banks’ customers: drop by about 3.5 percentage points of GDP during 2017-2021. - Annual FDI: drop by about 0.3 percentage point of GDP. - Banking system CAR: would fall by close to 3.5 percentage points but would remain above the prudential minimum of 9 percent; some banks’ CARs could fall to close to the prudential minimum, including the systemic bank. - Banks’ Net Foreign Assets: impact would be marginal as both assets and liabilities are affected in a similar manner. - Assumption: 90 percent of affected transactions find workarounds in the low stress scenario. ### Belize—observed impact and facts - During 2015 up to early 2016, major global banks terminated some 22 CBR accounts (71 percent) in 9 banks out of 31 total accounts in the banking system. - The largest indigenous bank in terms of assets lost all its CBRs; only a Canadian-owned bank that accounts for 19 percent of system’s asset did not lose any of its own. - Central Bank of Belize (CBB) lost two of its five CBRs, including one used to temporarily process selected wires for commercial banks that lost their CBRs. - Certain sectors and business lines seriously affected: many local banks closed accounts of money transfer business clients; banks decided against processing incoming/outgoing wire transfers of credit union members on ground that segment is considered ‘nesting’. - Transaction costs and delays: - Cost of wire transfers has increased three-fold in one bank. - Processing times of wire transfers increased from “within twenty-four hours” to “several days.” - Offshore banks’ deposits declined by more than 20 percent in 12 months to March 2016. - Present situation: all affected banks have CBRs but most new ones are wire transfer arrangements with less-known banks and non–bank service providers; every bank has at least two CBRs but many rely on the same correspondent bank. - Cross-border financial transactions were not disrupted as initially feared due to CBB support and major credit card companies (some raised credit limits), facilitating payments previously done via wire transfers and trade credit lines. - Macroeconomic manifestations: restricted access to financial services for certain customers and business lines; delays in international payments; higher transaction costs; higher cost for due diligence; delays in settlement of remittances. ### Factors behind CBR withdrawal in Belize (as identified) - Concerns related to enforcement of global regulatory standards such as AML/CFT and prudential regulations. - Belize recently exited from the CFATF follow-up and monitoring process, indicating progress on AML/CFT. - Major U.S. correspondent bank continues relations with CBB and one commercial bank, despite closing accounts of other banks; termination notices often did not provide specific reasons. - Certain customers, business lines, markets and jurisdictions perceived as too risky/costly in compliance terms and thus being cut off. - Money laundering and terrorist financing risks linked to misuse of legal persons and arrangements (companies, trusts, foundations), service providers licensed by IFSC, and offshore banks could be significant. - IFSC allows establishment of complex entities through many registered agents and intermediaries abroad without proper mechanism to have beneficial ownership information available, accessed, and disseminated in a timely manner. ### Policy response and recommendations for Belize - CBB actions taken: - Temporarily processed affected banks’ cash documents and limited amount of wire transfers using its own CBR account with a U.S. bank. - Met with the major U.S. bank that terminated many CBRs to understand reasons. - Met with U.S. officials to attempt to secure replacement CBRs. - Some local banks considered acquiring small US-licensed banks. - Recommended actions: - Further strengthen effectiveness of AML/CFT framework and enhance entity transparency, especially in the offshore sector. - Continue dialogue with the US Treasury (UST) which conducted a preliminary assessment of TA needs. - Stronger focus on risk-based supervision of banks and imposing corrective actions and sanctions, when relevant. - IFSC’s registered agents and service providers should be subject to proper licensing requirements and be monitored for compliance with AML/CFT requirements on a risk basis. - Develop mechanisms (e.g., public registry for beneficial ownership) to allow timely access to adequate, accurate, and current information on beneficial ownership of all types of entities created in Belize. - Entities’ registers should immediately publish basic information related to entities created in Belize with severe sanctions for noncompliance. *wp17209 - ANNEX 1. MACROECONOMIC IMPLICATIONS OF A CONTINUED LOSS OF CBRS: AN* ### ANNEX III. AN ECONOMETRIC ANALYSIS OF THE DETERMINANTS OF THE ### ANNEX III. AN ECONOMETRIC ANALYSIS OF THE DETERMINANTS OF THE WITHDRAWAL OF CBRS ### Model specification - Dependent variable ∆Yi: percent change between 2011 and 2015 in each economy i, measured as: - percent change in the number of active correspondents; - change in volume of correspondent banking transactions; - change in the value of correspondent banking transactions. - Explanatory variables: - GDPi: real average GDP growth between 2011 and 2015, in percent; - LnGDPi: natural log of nominal GDP in USD in 2015; - BIS_Liabi: BIS liabilities – taken in percent of GDP and in percent of onshore banking sector assets – proxy for size of the offshore financial sector; - Caribi: dummy = 1 for Caribbean economies, 0 otherwise; - OFCi: dummy = 1 for offshore financial centers, 0 otherwise; - EU_crisisi: dummy = 1 for Cyprus, Greece, Ireland, Italy, Portugal, and Spain; - US_sanctioni: dummy = 1 for countries sanctioned by the U.S. (Includes Belarus, Myanmar, Burundi, Central African Republic, Cote d'Ivoire, Cuba, Democratic Republic of the Congo, Iraq, Lebanon, Libya, North Korea, Somalia, Sudan, South Sudan, Syria, Russia, Venezuela, Yemen, Zimbabwe). ### Data and sample - Cross-country sample used in regressions: 191 economies (original sample 204; 13 excluded as outliers defined as observations where estimates for at least one variable fall above 99th or below 1st percentile). - Data sources: SWIFT (percent changes in value, volume, number of active correspondents); BIS (BIS liabilities); World Economic Outlook (real GDP growth, nominal GDP); US Treasury (sanctions); IMF staff estimates and calculations. - Time window: changes measured between 2011 and 2015. ### Main findings and interpretation - Overall explanatory power: regressions explain a relatively small part of the change in CBR activity; regressions do not account for respondent bank–specific factors (size, business model, capacity to do due diligence). - Real GDP growth: consistently positive and often highly significant. - Change in Active Correspondents (Table A1): Real GDP growth, 2011-15 ave coefficients reported include 0.532***, 0.533***, 0.413***, 0.498***, 0.505**, 0.498**, 0.627***, 0.610*** (with p-values shown in table). - Change in Volume (Table A2): Real GDP growth, 2011-15 ave coefficients reported include 1.122***, 1.133***, 1.028***, 1.169***, 1.119**, 1.184**, 1.590***, 1.572***. - Change in Value (Table A3): Real GDP growth, 2011-15 ave coefficients reported include 1.196**, 1.196**, 0.797, 0.998*, 1.608*, 1.583*, 1.410**, 1.407**. - U.S.-imposed sanctions: negative and in many specifications statistically significant. - Change in Active Correspondents (Table A1): Dummy: U.S.-imposed Sanctions coefficients include -7.072**, -7.336***, -6.421, -6.315, -6.502**, -6.735**. - Change in Value (Table A3): Dummy: U.S.-imposed Sanctions coefficients include -23.50**, -24.13**, -27.89*, -27.48*, -22.61**, -22.65**. - EU Crisis dummy: large negative and highly significant across specifications. - Change in Active Correspondents (Table A1): EU Crisis coefficients include -20.10***, -19.60***, -19.59***, -19.84***, -19.66***. - Change in Volume (Table A2): EU Crisis coefficients include -33.29***, -28.06***, -28.16***, -32.98***, -32.79***. - Change in Value (Table A3): EU Crisis coefficients include -47.60***, -42.74***, -42.69***, -46.99***, -46.96***. - Size of economy (Ln Nominal GDP in USD 2015): signs generally as expected but often not statistically significant in Active Correspondents and Value regressions; negative and statistically significant in many Volume regressions. - Change in Volume (Table A2): Ln (Nominal GDP in USD 2015) coefficients include -2.272***, -2.264***, -1.816**, -2.623**, -2.144*, -1.784**, -1.829**. - Offshore financial centers (OFC dummy): coefficients often point to negative correlation with CBR activity but are frequently not statistically significant. - Change in Volume (Table A2): Dummy: OFC coefficients include -3.227, -6.613, -8.689*, -8.775*, -6.320, -14.50**, -10.43, -12.00**, -12.88**. - Change in Active Correspondents (Table A1): Dummy: OFC coefficients include -0.993, -0.201, -0.371, -0.470, 1.013, -0.192, -0.595, -0.466, -1.297. - Caribbean dummy: generally negative estimates for CBR activity but not always statistically significant; some positive coefficients in Active Correspondents regressions in selected specifications. - Change in Active Correspondents (Table A1): Dummy: Caribbean coefficients include 0.986, 1.363, 1.180, 0.812, 0.207, -0.439, 0.282, 0.286, 1.392, 1.026. - Change in Value (Table A3): Dummy: Caribbean coefficients include -17.22*, -13.79, -14.97, -14.69, -16.70, -18.23*, -12.32, -12.31, -19.02*, -19.09*. - BIS liabilities (as % onshore banking assets or % GDP) and interactions with OFC: mixed results; some statistically significant coefficients in specific specifications (e.g., Table A1 and Table A3 show individual coefficient entries such as -3.280***, -3.127***, -4.032***, -3.311**, -2.515, -3.151**, -1.900, -1.359, -2.987**, -2.354 for certain BIS liabilities entries). ### Regression fit and sample details (selected) - Number of observations by specification (reported across tables): 191, 191, 176, 176, 176, 176, 117, 117, 163, 163. - R-squared ranges reported in tables: - Change in Active Correspondents (Table A1): R-squared values include 0.001, 0.002, 0.068, 0.070, 0.100, 0.231, 0.249, 0.250, 0.269, 0.281. - Change in Volume (Table A2): R-squared values include 0.002, 0.004, 0.059, 0.105, 0.109, 0.168, 0.199, 0.207, 0.211, 0.214. - Change in Value (Table A3): R-squared values include 0.017, 0.026, 0.050, 0.051, 0.075, 0.129, 0.165, 0.165, 0.154, 0.154. - Significance notation in tables: *** p<0.01, ** p<0.05, * p<0.1. P-values are shown in parenthesis in the tables. ### Limitations and interpretation caveats - Country-level regressions explain a relatively small share of variation in changes in CBR activity (low R-squared in many specifications). - Important respondent bank–specific factors are not included (size, business model, capacity to do due diligence), and these are likely to be important determinants. - Several specifications were explored; reported tables (A1–A3) show alternative specifications and robustness checks. *Sources: SWIFT; BIS; World Bank; US Treasury; IMF, WEO, and staff estimates and calculations.* --- _Source: https://www.imf.org/-/media/files/publications/wp/2017/wp17209.pdf_