Relations in Banking – Making it Work for Everyone
IMF News, July 18, 2016
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- Published: July 18, 2016
Introduction and framing
- Speaker: Christine Lagarde; venue: New York Fed; date: July 18, 2016.
- Focus: challenges facing banks and their clients in developing countries, small island economies, and some emerging market economies with small financial systems.
- Central concern: withdrawal of large global banks from smaller countries — notably the decline of correspondent banking relationships — risks marginalizing vulnerable countries and disrupting remittance and cross-border payment channels.
- Rationale: well-functioning financial systems are essential for growth, capital allocation, and empowering the poor and the small to participate in the economy.
1. Disruptions in Banking Relations – Who is Affected and Why
- Scope and scale:
- Correspondent banking is core to the business of over 3,700 banking groups in 200 countries.
- Société Générale: manages 1,700 correspondent accounts and processes 3.3 million correspondent transactions every day.
- Examples of countries and impacts:
- Caribbean: as of May this year, at least 16 banks across five countries have lost all or some of their correspondent banking relationships.
- Liberia: global banks have terminated almost half of the existing 75 correspondent relations, severely affecting the ability of local banks to conduct U.S. dollar transactions.
- Samoa: termination of accounts of Samoan-linked money transfer services agents increased fragility of the remittances corridor; remittances account for 20 percent of GDP in Samoa.
- Larger countries affected include Mexico and the Philippines, where remittances play an important role; rural and remote regions are hardest hit.
- Causes and dimensions:
- Multiple actors and motivations: correspondent banks (private, business-driven), regulators (economic and financial stability), treasuries and finance ministries (tax, AML/CFT), security agencies.
- Drivers cited by global banks:
- Re-assessment of business lines based on cost-benefit considerations: global regulatory reforms have raised the cost of capital, making high-volume, low-return businesses such as correspondent banking less appealing.
- Uncertainty about regulatory obligations and the possibility of large penalties and reputational risks related to sanctions, tax transparency, and anti-money laundering.
- Influence of enforcement instruments (e.g., Deferred Prosecution Agreements) and high-profile enforcement actions that can affect perceived expectations.
- Role of regulation:
- Bank supervisors did not instruct termination of specific relationships; regulatory stance characterized as a risk-based approach to enforcement.
- Regulators have increased public dissemination of information on regulations and enforcement actions (example: U.S. Treasury Department efforts).
2. Collective Action to Mitigate a Breakdown in Banking Relationships
- Diagnosis: collective action problem — affected countries, regulators, and global banks each have roles and incentives but incomplete alignment.
- Policy and action priorities:
- For affected countries:
- Upgrade regulatory and supervisory frameworks to enhance compliance with international standards, especially AML/CFT and tax transparency.
- Reassess business models that depend on opaqueness, offshore structures, and lack of transparency.
- Example: Mexico issued regulations to increase AML/CFT controls and required Legal Entity Identifier use for banks and large firms involved in certain transactions, in coordination with home authorities of global banks — reduced risk of disruption in correspondent banking.
- For regulators in key financial centers:
- Continue outreach and dialogue with global banks and affected jurisdictions to clarify and consistently communicate regulatory expectations.
- Collaborate with other public authorities to improve compliance and mitigate disruptions in key business categories such as remittances.
- Example: Federal Reserve Bank of Atlanta set up an automated clearing house for cross-border payment services, securing remittance flows to more than 25 countries in Central and South America.
- Foster a common domestic understanding of the regulatory perimeter across government, bank regulators, other financial supervisors, and judicial agencies.
- For the financial industry:
- Consider the business case for banking in small countries beyond short-term profitability.
- Work collectively to reduce compliance costs and maintain financial lifelines (e.g., “Know Your Customer” utilities to centralize customer due diligence information).
- Support training of bankers on implementing AML/CFT regulations in remote jurisdictions.
- Recognize potential entry of fintech players into payments; weigh consumer benefits against risks of informal or illegal remittance channels emerging if banks withdraw.
- Risks of inaction:
- Potential for informal and illegal channels to expand, reducing security for remittances and complicating legitimate banking business generation.
- Possibility that disruptions could become systemic if left unaddressed.
3. How Can the IMF Help?
- IMF activities and capabilities:
- Financial Stability Assessment Program (introduced in 1999) used to identify weaknesses and guide remedial training and technical assistance, including AML/CFT.
- Past and ongoing AML/CFT technical assistance:
- Over the past decade, technical assistance on AML/CFT has been provided to 118 countries.
- Currently 37 ongoing projects in 29 countries.
- By now, almost all member countries have had at least one AML/CFT assessment.
- Case work and pilots:
- Samoa: IMF facilitating pilot dialogue with stakeholders (agencies in Australia and New Zealand, central banks, regulators, bankers, and money transmitters associations) to find options to safeguard remittance flows without undermining AML/CFT compliance.
- Convening and coordination:
- Organized discussions with partners at the Financial Stability Board and the World Bank to develop shared understanding of drivers.
- Through IMF membership in the Financial Stability Board, support further clarification of international standards and contribute to their implementation.
Conclusion and key takeaways
- Central message:
- A strong and open international financial system is key to restoring momentum in the global economy; enhancing financial inclusion can pay big dividends for countries and global banks.
- Financial stability should not come at the expense of access.
- Call to action:
- Countries: upgrade regulatory frameworks.
- Regulators in key financial centers: clarify regulatory expectations and ensure consistent application over time.
- Global banks: avoid knee-jerk reactions; find sensible ways to reduce costs and sustain correspondent banking and remittance channels.
- Stakes: important for both large and small economies; urgency to act collectively to preserve access to global payment and settlement systems.
Speech by Christine Lagarde at the New York Fed, July 18, 2016.