DEAL­ING WITH DE-RISK­ING

As the Caribbean strug­gles to main­tain its CBRs, de-risk­ing has emerged as one of the big­gest threats to bank­ing in the re­gion

The Star (St. Lucia) - Business Week - - INTERNATIONAL FINANCE CORPORATION - BY CATHER­INE MOR­RIS, STAR BUSI­NESS­WEEK COR­RE­SPON­DENT

Cor­re­spon­dent Bank­ing Re­la­tion­ships (CBRs) are cru­cially im­por­tant to bank­ing in­sti­tu­tions around the world. These busi­ness con­nec­tions (usu­ally forged be­tween global banks and their smaller, re­gional coun­ter­parts) al­low banks to share best prac­tices, mit­i­gate risk, make cross-bor­der pay­ments, pro­vide more di­verse ser­vices and plug into the global fi­nan­cial sys­tem.

Speak­ing at a con­fer­ence in The Ba­hamas last week, Carolina Claver, Se­nior Fi­nan­cial Sec­tor Ex­port in the In­ter­na­tional Mon­e­tary Fund (IMF)’s Le­gal De­part­ment em­pha­sised the im­por­tance of these con­nec­tions, say­ing: “CBRs play a key role in global trade and eco­nomic ac­tiv­ity. Many of the trans­ac­tions that take place on a daily would not be pos­si­ble [with­out them]. CBRs are a com­mu­ni­ca­tion high­way where banks in one ju­ris­dic­tion have ac­cess to ser­vices in an­other coun­try.”

De-risk­ing oc­curs when global banks de­cide to sever their CBRs, pulling out of re­gional mar­kets and re­trench­ing to their coun­try of ori­gin. The de­ci­sion is usu­ally made based on a cost-ben­e­fit anal­y­sis. If op­er­a­tions in the for­eign mar­ket are con­sid­ered low-mar­gin and high-risk, banks have lit­tle in­cen­tive to re­main. “The with­drawal of CBRs is a re­flec­tion of the cor­re­spon­dent bank’s as­sess­ment of prof­itabil­ity and risk,” says Claver. “What we [at the IMF] have no­ticed is that banks do an anal­y­sis of the whole sit­u­a­tion. It is a busi­ness re­la­tion­ship based on trust and the cor­re­spon­dent bank needs to have con­fi­dence in the way that do­mes­tic banks man­age their risk. We all know we can­not elim­i­nate risk. Risk is out there. The ques­tion is if the frame­work is in place to prop­erly man­age that risk.”

In re­cent years, con­cerns over Anti Money Laun­der­ing (AML) and Com­bat­ing the Fi­nanc­ing of Ter­ror­ism (CFT) have come to the fore in the Caribbean, lead­ing many banks to con­clude that their pres­ence in the re­gion just isn’t worth it. Ac­cord­ing to a 2015 global sur­vey by the World Bank Group, the Caribbean is the re­gion most se­verely af­fected by the de­cline in CBRs and the mar­ket most likely to cut ties was the US fol­lowed by the UK, France, Ger­many and Canada. This im­pacts ser­vices such as in­ter­na­tional wire trans­fers, check clear­ing, cash man­age­ment and trade fi­nance.

BIG IM­PACT ON SMALL COUN­TRIES

De-risk­ing is bad news for both banks and con­sumers. Not only does it leave re­spon­dent banks more vul­ner­a­ble to the va­garies of the mar­ket, it also lim­its fi­nan­cial in­clu­sion. Around half of the Caribbean’s adult pop­u­la­tion is ‘un­banked’, mean­ing they don’t have a bank ac­count or ac­cess to bank­ing ser­vices. Op­er­at­ing purely in a cash-based econ­omy, these cit­i­zens are at the mercy of crime, cor­rup­tion and poverty.

De-risk­ing is a chal­lenge for all Caribbean banks and Saint Lu­cia has not es­caped its ef­fects. Proven In­vest­ments Ltd snapped up The Bank of Saint Lu­cia In­ter­na­tional Lim­ited (BOSIL) for a “bar­gain price” last year af­ter the bank strug­gled to main­tain its CBRs. Heav­ily de­pen­dent on Latin Amer­i­can busi­ness, BOSIL was hit hard by the de-risk­ing trend and sold to Proven at around twothirds its value. The bank’s new owner has since com­mit­ted to build­ing back that busi­ness by dou­bling its CBRs.

As a small coun­try, Saint Lu­cia is par­tic­u­larly vul­ner­a­ble to de-risk­ing. Some of Saint Lu­cia’s big­gest money-mak­ers – tourism, Ci­ti­zen­ship by In­vest­ment pro­grammes, FDI - rely on in­ter­na­tional in­vestors and the abil­ity to of­fer a range of cross-bor­der bank­ing ser­vices. “Smaller coun­tries face cer­tain chal­lenges. These are small, open economies which have ex­ten­sive links to the global econ­omy and a strong re­liance on tourism, trade, re­mit­tances and FDI. There’s lim­ited re­silience to shocks and ca­pac­ity con­straints,” ex­plains Claver.

DI­A­LOGUE AND SO­LU­TIONS

De-risk­ing is es­sen­tially a busi­ness de­ci­sion. CBRs can be pre­served pro­vided they tip the bal­ance be­tween risk and cost for a more favourable re­sult. There are sev­eral ways to re­duce risk while in­creas­ing profit but one of those gain­ing at­ten­tion is FinTech. Lev­er­ag­ing fi­nan­cial tech­nol­ogy can help banks save by low­er­ing com­pli­ance costs, stream­lin­ing ser­vices and iden­ti­fy­ing in­ef­fi­cien­cies. “FinTech could have a lot of ben­e­fits. Tech­nol­ogy needs to be brought to the ta­ble in the medium and long-term,” says Claver.

In March the East­ern Caribbean Cen­tral Bank (ECCB) signed an agree­ment with Bar­ba­dos-based FinTech firm Bitt Inc to cre­ate a pi­lot on blockchain tech­nol­ogy in ECCB mem­ber states. The banks hope the scheme will mit­i­gate the East­ern Caribbean’s risk pro­file and there­fore guard against fur­ther de-risk­ing.

Projects such as that un­der­taken by the ECCB and Bitt Inc are help­ful in cre­at­ing a more ef­fec­tive AML/CFT regime in the re­gion, ad­dress­ing the per­cep­tion that the Caribbean is a high-risk area. The Caribbean Fi­nan­cial Ac­tion Task Force has been proac­tive in en­sur­ing states are fol­low­ing best prac­tices, im­ple­ment­ing the nec­es­sary reg­u­la­tion and stay­ing ahead of in­dus­try is­sues. Im­proved com­mu­ni­ca­tion be­tween cor­re­spon­dent banks and re­spon­dent banks would help con­vey these ef­forts and high­light the progress made.

In 2017, the Caribbean De­vel­op­ment Bank launched a US$ 2,550,000 ini­tia­tive to help pre­vent de-risk­ing. The three-year project will be im­ple­mented in the Or­gan­i­sa­tion of East­ern Caribbean States and aims to strengthen fi­nan­cial in­tegrity stan­dards, in­crease the tech­ni­cal ca­pac­ity of banks and im­prove pub­lic-pri­vate sec­tor co­or­di­na­tion with reg­u­la­tors.

The IMF is play­ing its part too, host­ing sev­eral Caribbean round­tables to open up dis­cus­sion. Claver ex­plains: “The IMF has taken a mul­ti­pronged ap­proach to mon­i­tor trends and risk, to fa­cil­i­tate di­a­logue among stake­hold­ers and to tai­lor ca­pac­ity de­vel­op­ment. We need to sit to­gether to find a shared re­sponse. It is not enough if all ef­forts are on one side, we need collective ef­fort. Coun­tries need to dis­pel the mis­per­cep­tions, clar­ify what is ex­pected and com­mu­ni­cate ef­forts un­der­taken.

“Loss of CBRs is sta­b­lis­ing in the re­gion [but] we need to keep en­gaged, foster di­a­logue and con­tinue to try to find prac­ti­cal so­lu­tions.”

Cor­re­spon­dent bank­ing is the cor­ner­stone of the global pay­ment sys­tem, de­signed to serve the set­tle­ment of fi­nan­cial trans­ac­tions across coun­try borders. It al­lows com­pa­nies and in­di­vid­u­als to safely move money around the world and sup­ports and en­cour­ages global trade

Money laun­der­ing is the process of mak­ing il­le­gal­ly­gained pro­ceeds ap­pear le­gal. Typ­i­cally, it in­volves three steps: place­ment, lay­er­ing, and in­te­gra­tion. First, the il­le­git­i­mate funds are furtively in­tro­duced into the le­git­i­mate fi­nan­cial sys­tem. Then, the money is moved around to cre­ate con­fu­sion, some­times by wiring or trans­fer­ring through nu­mer­ous ac­counts. Fi­nally, it is in­te­grated into the fi­nan­cial sys­tem through ad­di­tional trans­ac­tions un­til the “dirty money” ap­pears “clean”

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