{
  "title": "Relations in Banking – Making it Work for Everyone",
  "publication": "IMF News, July 18, 2016",
  "sourceUrl": "https://www.imf.org/en/news/articles/2016/07/15/13/45/sp071816-relations-in-banking-making-it-work-for-everyone",
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  "summary": "Speech by Lagarde at the New York Fed",
  "publishDate": "2016-07-18",
  "sections": [
    {
      "heading": "Introduction and framing",
      "content": "- Speaker: Christine Lagarde; venue: New York Fed; date: July 18, 2016.\n- Focus: challenges facing banks and their clients in developing countries, small island economies, and some emerging market economies with small financial systems.\n- 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.\n- Rationale: well-functioning financial systems are essential for growth, capital allocation, and empowering the poor and the small to participate in the economy."
    },
    {
      "heading": "1. Disruptions in Banking Relations – Who is Affected and Why",
      "content": "- Scope and scale:\n  - Correspondent banking is core to the business of over 3,700 banking groups in 200 countries.\n  - Société Générale: manages 1,700 correspondent accounts and processes 3.3 million correspondent transactions every day.\n- Examples of countries and impacts:\n  - Caribbean: as of May this year, at least 16 banks across five countries have lost all or some of their correspondent banking relationships.\n  - 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.\n  - 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.\n  - Larger countries affected include Mexico and the Philippines, where remittances play an important role; rural and remote regions are hardest hit.\n- Causes and dimensions:\n  - Multiple actors and motivations: correspondent banks (private, business-driven), regulators (economic and financial stability), treasuries and finance ministries (tax, AML/CFT), security agencies.\n  - Drivers cited by global banks:\n    - 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.\n    - Uncertainty about regulatory obligations and the possibility of large penalties and reputational risks related to sanctions, tax transparency, and anti-money laundering.\n    - Influence of enforcement instruments (e.g., Deferred Prosecution Agreements) and high-profile enforcement actions that can affect perceived expectations.\n  - Role of regulation:\n    - Bank supervisors did not instruct termination of specific relationships; regulatory stance characterized as a risk-based approach to enforcement.\n    - Regulators have increased public dissemination of information on regulations and enforcement actions (example: U.S. Treasury Department efforts)."
    },
    {
      "heading": "2. Collective Action to Mitigate a Breakdown in Banking Relationships",
      "content": "- Diagnosis: collective action problem — affected countries, regulators, and global banks each have roles and incentives but incomplete alignment.\n- Policy and action priorities:\n  - For affected countries:\n    - Upgrade regulatory and supervisory frameworks to enhance compliance with international standards, especially AML/CFT and tax transparency.\n    - Reassess business models that depend on opaqueness, offshore structures, and lack of transparency.\n    - 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.\n  - For regulators in key financial centers:\n    - Continue outreach and dialogue with global banks and affected jurisdictions to clarify and consistently communicate regulatory expectations.\n    - Collaborate with other public authorities to improve compliance and mitigate disruptions in key business categories such as remittances.\n    - 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.\n    - Foster a common domestic understanding of the regulatory perimeter across government, bank regulators, other financial supervisors, and judicial agencies.\n  - For the financial industry:\n    - Consider the business case for banking in small countries beyond short-term profitability.\n    - Work collectively to reduce compliance costs and maintain financial lifelines (e.g., “Know Your Customer” utilities to centralize customer due diligence information).\n    - Support training of bankers on implementing AML/CFT regulations in remote jurisdictions.\n    - Recognize potential entry of fintech players into payments; weigh consumer benefits against risks of informal or illegal remittance channels emerging if banks withdraw.\n- Risks of inaction:\n  - Potential for informal and illegal channels to expand, reducing security for remittances and complicating legitimate banking business generation.\n  - Possibility that disruptions could become systemic if left unaddressed."
    },
    {
      "heading": "3. How Can the IMF Help?",
      "content": "- IMF activities and capabilities:\n  - Financial Stability Assessment Program (introduced in 1999) used to identify weaknesses and guide remedial training and technical assistance, including AML/CFT.\n  - Past and ongoing AML/CFT technical assistance:\n    - Over the past decade, technical assistance on AML/CFT has been provided to 118 countries.\n    - Currently 37 ongoing projects in 29 countries.\n    - By now, almost all member countries have had at least one AML/CFT assessment.\n  - Case work and pilots:\n    - 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.\n  - Convening and coordination:\n    - Organized discussions with partners at the Financial Stability Board and the World Bank to develop shared understanding of drivers.\n    - Through IMF membership in the Financial Stability Board, support further clarification of international standards and contribute to their implementation."
    },
    {
      "heading": "Conclusion and key takeaways",
      "content": "- Central message:\n  - 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.\n  - Financial stability should not come at the expense of access.\n- Call to action:\n  - Countries: upgrade regulatory frameworks.\n  - Regulators in key financial centers: clarify regulatory expectations and ensure consistent application over time.\n  - Global banks: avoid knee-jerk reactions; find sensible ways to reduce costs and sustain correspondent banking and remittance channels.\n- Stakes: important for both large and small economies; urgency to act collectively to preserve access to global payment and settlement systems.\n\nSpeech by Christine Lagarde at the New York Fed, July 18, 2016.\n\n---\n\n\n References\n\n- Christine Lagarde\n- Mexico and the IMF\n- Samoa and the IMF\n- United States and the IMF\n- The IMF and the Fight Against Money Laundering and the Financing of Terrorism\n- Speeches\n- PRESS CENTER\n- The Withdrawal of Correspondent Banking Relationships: A Case for Policy Action\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2016/07/15/13/45/sp071816-relations-in-banking-making-it-work-for-everyone"
    }
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    "Published: July 18, 2016",
    "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.",
    "Scope and scale:",
    "Examples of countries and impacts:",
    "Causes and dimensions:",
    "Diagnosis: collective action problem — affected countries, regulators, and global banks each have roles and incentives but incomplete alignment.",
    "Policy and action priorities:",
    "Risks of inaction:",
    "IMF activities and capabilities:",
    "Central message:",
    "Call to action:",
    "Stakes: important for both large and small economies; urgency to act collectively to preserve access to global payment and settlement systems.",
    "[Christine Lagarde](http://www.imf.org/external/np/omd/bios/cl.htm)",
    "[Mexico and the IMF](http://www.imf.org/external/country/MEX/index.htm)",
    "[Samoa and the IMF](http://www.imf.org/external/country/WSM/index.htm)",
    "[United States and the IMF](http://www.imf.org/external/country/USA/index.htm)",
    "[The IMF and the Fight Against Money Laundering and the Financing of Terrorism](https://www.imf.org/en/about/factsheets/sheets/2023/fight-against-money-laundering-and-terrorism-financing)",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[The Withdrawal of Correspondent Banking Relationships: A Case for Policy Action](http://www.imf.org/external/pubs/cat/shortres.aspx?Lang_F=All&TITLE=withdrawal&Year=Year&auth_ed=&datecrit=During&ser_note=Staff+Position+OR+Staff+Discussion&subject=)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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