The Caribbean Response to the Withdrawal of Correspondent Banking


IMF Deputy Managing Director, Tao Zhang

Release Date

Saturday, October 29, 2016


Conference on the Withdrawal of Correspondent Banking Relationships - IMF Deputy Managing Director, Tao Zhang, Antigua and Barbuda

October 28, 2016

Honorable Prime Minister, central bank governors, and distinguished guests, good morning! It is a pleasure to join all of you here.

I am so pleased to be able to join you on my first official overseas visit in my new capacity as IMF Deputy Managing Director. This visit provides the opportunity to see the beauty of Antigua and Barbuda—and to learn more about a region rich in history and culture.

To see a country so dependent on the linkages between financial services and tourism and other sectors provides an immediate understanding of the importance of today’s conference.

The discussions yesterday and today highlight a serious problem that relates to a lifeline for your economies—the withdrawal of correspondent banking relationships, also known as CBR.

Indeed, this problem is not only observed in the Caribbean. Countries in Africa, Asia, Europe, and the Middle East are also losing banking services that keep them connected to the global financial system.

This issue received substantial attention during the IMF Annual meetings earlier this month. Policy makers, regulators, and bank representatives attended a conference there to discuss solutions to the problem. This is a collective problem that calls for a collective solution.

And I understand that this is the reason why we are gathered here today once again to make headways in solving this problem.

In my remarks this morning, I would like to address three themes:

  • First, to outline the scope and sources of the problem;

  • Second, to take stock of the policy response here in the Caribbean region, and, more broadly, from the international community;

  • Finally, I would like to discuss some of the issues that need to be addressed going forward.

What is the scope of the problem?

The Caribbean Association of Banks says that almost 60 percent of member institutions that it has interviewed report a loss of such relationships.

This is creating a difficult situation for some affected countries. For example, banks in Belize with assets equivalent to half of GDP are affected.

In some cases, while Caribbean banks have been able to hold on to their correspondent relationships, key services have been discontinued. These include check clearance, trade finance, and wire transfers.

Some banks face higher costs for the remaining services.

In many other cases, global correspondent banks have withdrawn from transactions involving money transfer operators. But these operators traditionally have been the intermediaries for remittances, which are a crucial source of income for the most vulnerable people in the Caribbean.

If the trend is not arrested, it could damage not only financial stability, but also economic growth, financial inclusion, and other development goals. Of course these potential consequences are worrisome.

Moreover, the continued loss of legitimate correspondent banking services may drive legitimate transactions underground.

This would encourage transactions in cash and increase other forms of informality.

So the end result could be to undermine the objectives of the progress we have seen in the effort to supervise and regulate the financial sector services and activities, including the effort to fight money laundering and combat the financing of terrorism.

What is driving this trend?

In short, the withdrawal of CBRs is partly a reflection of cost-benefit tradeoffs growing out of increased regulation and enforcement affecting international banks, global banks.

Regulatory reforms have produced increased bank capital and liquidity requirements. This has contributed to reduced profitability of correspondent banking.

In addition, compliance costs have increased because of the intensified efforts to combat money laundering and terrorism financing.

Banks also have to respond to efforts to promote international tax transparency.

The bottom line is rising expenses, relative to the potential benefits associated with banks’ engagement in the region.

Global banks acknowledge that decisions to withdraw some services have been driven partly out of fear of large sanctions.

They point to a risk-assessment of respondent banks’ ability to implement adequate customer due diligence.

The tendency toward drastic action has been more likely where regulatory expectations are unclear and risks cannot be mitigated.

How to deal with this problem?

Let’s look at what has been done.

Caribbean authorities and those in other affected countries have been actively addressing this policy challenge in global meetings and in interactions with developed country officials.

This already is having significant results: regulators in the home countries of global banks are becoming more proactive in clarifying their regulatory expectations.

For example, the U.S. Treasury Department is putting considerable resources into educating financial institutions on the precise nature of transactions and behaviors that are subject to sanctions.

In the region, reports of the Caribbean Financial Action Task Force indicate that countries are making progress bringing their AML/CFT frameworks to international standards.

However, effective implementation and enforcement remain a challenge.

To this end, ECCU countries have decided to consolidate their national AML/CFT work into one regional operation, under the responsibility of the ECCB.

Most countries have also signed an intergovernmental agreement with the United States to facilitate compliance with U.S. tax law.

They also are committed to implementing the OECD Common Reporting Standards. The first information exchanges are targeted for the next two years.

The international community has also been active in looking for solutions to this challenge.

The Financial Stability Board has a four-point action plan on correspondent banking.

These include: establishing regular data collection and monitoring; clarifying regulatory expectations; capacity building; and strengthening tools for customer due diligence. These are clearly areas where the Caribbean will most need the support of the international community.

The Financial Action Taskforce has just issued a new guidance specifying that the principle of "knowing your customer’s customer" is not generally required in international banking.

However, respondent banks may be required to answer queries from correspondent banks about their customers in a timely manner.

For the private sector, banks world-wide continue to invest in employee training and implementing better AML/CFT platforms.

Some global banks have launched multi-year projects to build comprehensive databases and develop technology for universal customer coverage.

These innovations will allow banks to improve "know-your-customer" frameworks, better monitor transactions, and identify patterns of illegal activity.

All these responses and the progress so far are welcome and indeed encouraged. But there is a lot more to be done.

So what are the next steps?

We know by now what the problems are. We also know that while there is "no quick fix" to the problem. There is an urgent need for action to mitigate the impact on affected economies. How can we then best address these issues collectively?

Here, I would like to lay out three areas that I think we should explore further, discussing pros and cons, in order to move forward toward concrete actions:

  • addressing the problem of economies of scale;

  • mitigating cost and technical limitations;

  • improving information flows.

First, on the economies of scale.

As small states, the Caribbean countries are likely to offer relatively small volumes of CBR transactions. This makes it difficult for banks to generate economies of scale--and therefore higher profits from CBR activity.

How can small institutions adapt?

We need to determine whether small Caribbean banks can bundle transactions to create the scale required for global banks to maintain banking services.

For example, one could explore if there is scope for some consolidation of banking systems in the region. If there is, how to do it? Can it be done through public or private initiatives, or some combination of the two? In each of these options, what are the benefits and costs?

Second, on cost and technical limitations. Technology can be part of the solution by reducing compliance costs and strengthening "know-your-customer" frameworks.

On the one hand, various industry solutions can be considered in the region to reduce the cost of compliance.

For example, one approach is to take advantage of "know-your-customer" software utilities, which store customer due-diligence information in a single repository and allow easy access to bank customer information.

This may help respondent banks to reply to correspondent banks’ requests in a comprehensive and timely manner. They may also help correspondent banks to identify and mitigate risks.

On the other hand, global banks should continue to work toward building comprehensive databases and developing technology for universal customer coverage. This will allow them to better monitor transactions and to identify illicit activity. Some governments are also pursuing similar innovations.

The third issue is information sharing. Durable solutions will likely take a long time. Thus, it is essential to find interim approaches to improve the information flow between correspondent banks and respondent banks, and then make sure the channels are strengthened in the long run.

I have already mentioned the broader use of "know-your-customer" utilities as a possible step forward.

There is also a need to tackle legal and contractual obstacles to sharing information across institutions and borders. These include data privacy laws and diverging regulatory frameworks.

One further option is for banks to make more widespread use of the Legal Entity Identifier to identify corporate customers. The Legal Entity Identifier, or LEI, is designed specifically to help the authorities around the world clearly identify the entities that transact across markets, products and regions, and thus make it easier to recognize trends and risks and take appropriate corrective action.

Problems, issues, and solutions can go beyond the three areas I have just outlined. The overarching objective is to safeguard the integrity of financial systems, and at the same time address the unintended consequences of and collateral damages from stronger regulation.

For our part, the IMF is committed to helping you resolve this problem.

We can facilitate candid and constructive dialogue among all parties to achieve practical solutions.

We will continue to encourage standard-setting bodies to take into account the impact of CBR policies—particularly when there are unintended negative consequences like we are discussing now.

We will also encourage our member countries to work closely with correspondent banks to promote greater transparency on their exit decisions.

For example, it is important to ensure that they do not terminate a wider range of relations because of perceived problems with only a few respondent banks.

Needless to say, we will continue to provide technical assistance and build capacity. In particular, we will continue to work with you to strengthen and effectively implement your national AML/CFT and financial regulatory and supervisory frameworks in line with international standards.

We will build on ongoing efforts to identify concrete policy options. In this regard, I am pleased to note that IMF staff is in the process of preparing a paper on this very issue, for which your views from this conference will be very useful for our deliberations. Once approved by the IMF Executive Board early next year, we will work with you to implement it effectively.

Before I complete my remarks, I would like to reiterate that we at the IMF stand ready to work with you on this issue until it is resolved. It is essential to our partnership that we find solutions together.

Thank you.

Source: IMF Communications Department

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