## Relations in Banking – Making it Work for Everyone

_IMF News, July 18, 2016_

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## Bibliographic details
- Published: July 18, 2016

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### 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.*

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## References

- [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)

_Source: https://www.imf.org/en/news/articles/2016/07/15/13/45/sp071816-relations-in-banking-making-it-work-for-everyone_