Withdrawal of Correspondent Banks Poses Significant Risk to Caribbean

IMF News, November 11, 2016

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Correspondent banking relationships with global banks enable smaller banks to access the international payments system for wire transfers, check clearing, and currency exchange.
Large-scale withdrawal of correspondent banks cuts businesses off from international trade and financing, prevents families from collecting remittances, and can deter foreign investors worried about repatriating profits.
The issue was a major agenda item at the 2016 High Level Caribbean Forum in Port of Spain, Trinidad and Tobago, on November 2, 2016.

A survey conducted by the Caribbean Association of Banks shows banks in 12 countries in the region have experienced loss of correspondent banking.
Countries identified in the source include The Bahamas, Belize, Guyana, Jamaica, Suriname, Trinidad and Tobago, and countries in the Eastern Caribbean Currency Union.
In Belize, the withdrawal of correspondent banking relationships is systemic, with affected banks’ assets amounting to more than half of the domestic banking system’s assets.
In other countries, the loss has not reached systemic proportions but still presents an urgent threat.

Increased regulation of banking systems globally—aimed at addressing tax evasion and combating money laundering and the financing of terrorism—has made correspondent banking relationships costlier and less attractive to global banks.
Increased enforcement and unclear regulatory expectations expose correspondent banks to the possibility of large fines for noncompliance, particularly where local privacy laws prohibit sharing information about banks’ customers.
The withdrawal of correspondent banking services is characterized in the source as “de-risking” by global banks.
A related concern is that increased monitoring could push transactions into informal channels, making illicit transactions harder to monitor and potentially countering anti-money laundering efforts.

IMF officials regard de-risking as very important for member countries and reaffirm the IMF’s commitment to helping countries find solutions through increased policy dialogue and technical assistance.
Tao Zhang (IMF Deputy Managing Director) emphasized that: “The withdrawal of correspondent banking relationships presents a clear and present danger to the Caribbean.”
Zhang advocated that a solution requires dialogue between countries, regulators and banks, and increased information exchange to clarify regulatory expectations, build trust, facilitate capacity building, and highlight best practices.
Panelists urged urgency and encouraged policymakers to explore collective solutions to mitigate costs to individual countries from measures to address de-risking.
Suggested measures include taking advantage of better technology to facilitate information sharing and reduce the cost of providing correspondent banking services.

The forum discussed the likely impact of normalization of relations between Cuba and the United States, with the tourism sector seen as most likely to be affected.
Panelists noted potential short-term diversion of U.S. tourists to Cuba away from other Caribbean destinations if Cuba opens up to U.S. tourists.
The consensus was that the opening up of Cuba should be viewed as an opportunity to expand tourism in the rest of the Caribbean and to become more competitive and build the Caribbean brand.
Tao Zhang said: “The region has shown its resilience on this front before—when the Dominican Republic emerged as a tourist destination. It can be done again.”
Gervase Warner, President and CEO of Trinidad-based Massy Group, urged regional cooperation and a collective approach to address disadvantages caused by small economies: “There’s no cavalry coming to our rescue.”

IMF News — November 11, 2016