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
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”