IMF Executive Board Discusses Recent Trends in Correspondent Banking Relationships
IMF News, April 21, 2017
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- Published: April 21, 2017
Overview
- Press Release No. 17/137
- Date: April 21, 2017
- On April 12, 2017, the Executive Board discussed the staff report: “Recent Trends in Correspondent Banking Relationships-Further Considerations.”
- The staff report follows up to a Staff Discussion Note on the withdrawal of correspondent banking relationships (CBRs) issued in June 2016.
- Report focus:
- Further considerations on recent trends in, and consequences of, CBR withdrawal with emphasis on remittances.
- Assessment and proposals for responses to CBR pressures.
- Seek endorsement of Executive Board on staff engagement with the membership going forward.
Executive Board Assessment — key findings
- Directors welcomed discussion of recent trends and consequences of CBR withdrawal and emphasized the importance of CBRs in facilitating global trade and remittances, and supporting economic growth and development.
- General observations:
- Despite some withdrawal in CBRs, cross border payments have generally remained stable, and economic activity has been largely unaffected.
- In a limited number of countries, particularly small and fragile states, there has been a concentration of cross border flows through fewer CBRs or alternative arrangements.
- Concentration could accentuate financial fragilities, pose financial stability risks, and undermine long run growth, development, and financial inclusion prospects by increasing costs of financial services.
- Further monitoring and analysis, with better data, is needed to more fully understand potential impacts on financial sector stability, economic growth, and development.
Drivers of CBR withdrawal
- Drivers are multiple, inter related, and vary case by case.
- Core driver: individual business decisions of correspondent banks based on assessment of profitability and risks of CBRs, including concerns with respondent banks’ capacity to effectively manage risks.
- Contributing regulatory and enforcement factors:
- More rigorous prudential requirements.
- Economic and trade sanctions.
- Anti money laundering and combating the financing of terrorism (AML/CFT) measures.
- Tax transparency standards.
- Directors welcomed efforts by standards setters and regulators to provide greater clarity on international standards and regulatory expectations and encouraged continued efforts where necessary.
Policy responses, practical measures, and cautions
- Overarching view: no one size fits all solution; responses need to be tailored, prioritized, and sequenced by country or region and will take time.
- First “port of call” measures for countries concerned with CBR pressures:
- 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.
- Remove impediments to information sharing.
- Other initiatives to consider:
- Increase economies of scale and lower compliance costs.
- Address correspondent banks’ risk assessment concerns.
- Provide alternative arrangements.
- Note: these measures tend to have a more limited impact and would still need to comply with AML/CFT standards.
- Extreme scenario and public sector options:
- In the extreme event of a complete loss of CBRs by all commercial banks in a country, the public sector could consider as a last resort temporary mechanisms, including public backed vehicles, to provide payment clearing services.
- Several Directors urged caution regarding public sector intervention given uncertainties over effectiveness or feasibility and the potential for moral hazard.
Fund role, collaboration, and recommended actions
- Directors welcomed staff efforts in:
- Analyzing data, risks, and policy responses related to CBR withdrawal in surveillance.
- Assessing implementation of standards.
- Building capacity to strengthen regulatory and supervisory frameworks.
- Facilitating international dialogue.
- Collaborating with Financial Stability Board, Financial Action Task Force, World Bank, G20, and other relevant stakeholders to support efforts while avoiding work duplication.
- Directors supported a continued active role for the Fund to:
- Monitor risks and advise membership on policies to tackle adverse impacts from CBR pressures.
- Endorsed the multipronged approach outlined in the staff paper, including surveillance and data collection, FSAP assessments, and capacity development.
- Tailor capacity development assistance to specific circumstances and deliver at national and regional levels to maximize limited available resources and deepen impact.
- Specific initiatives noted:
- Directors welcomed the recently launched Caribbean Initiative to develop regional responses in collaboration with other technical assistance providers including regional development banks.
- Contingency for severe cases:
- Directors noted that a severe loss of CBRs stemming from policymaking challenges across a range of areas could require deeper Fund engagement.
- In such cases involving balance of payments difficulties, a Fund supported program could be considered to help restore external and domestic imbalances and would be expected to take place within existing lending frameworks.
Source: IMF Executive Board Discusses Recent Trends in Correspondent Banking Relationships, April 21, 2017.