Thu | Aug 17, 2017

De-risking could affect Caribbean people’s livelihood

Published:Wednesday | August 31, 2016 | 8:00 AMMcPherse Thompson
This January 2016 file photo shows Owen Arthur (second left), former Prime Minister of Barbados with, from left, Dr. Damien King, Co-Executive Director of the Caribbean Policy Reserach Institute (CaPRI); Earl Jarrett, general manager, Jamaica National Building Society; Nigel Holness, President of Jamaica Bankers Association; Dennis Chung, chief executrive officer of the Private Sector Organisation of Jamaica, and Dr. Christopher Tufton, Co-Executive Director of CaPRI at a roundtable discussion on correspondent banking at the Jamaica Pegasus Hotel in New Kingston.

The Caribbean Association of Banks (CAB) said that unless a solution can be found to the de-risking of regional financial institutions engaged in correspondent banking relationships, the livelihood of the region 's people will be in danger.

Supporting observations by International Monetary Fund (IMF) Managing Director Christine Lagarde, the CAB quoted her as saying that "it is a collective action problem that calls for a collective solution".

Lagarde likened correspondent banking to "the blood that delivers nutrients to different parts of the body" and that "it is core to the business of over 3,700 banking groups in 200 countries".

In a statement last week, the CAB said it "concurs with these sentiments and wishes to highlight that if the current trend is allowed to continue with no solution in sight, the very livelihoods of Caribbean people will be in danger".

The association says it supports the work of the IMF towards resolving the issue and commits to continue to work assiduously with its members to ensure that they satisfy any requirements on their part.

LEAVING HIGH RISK

According to a research report undertaken by the Global Center on Co-operative Society, de-risking refers to financial institutions exiting relationships with and closing the accounts of clients considered high risk.

The trend toward de-risking has resulted in account closures in the United States, the United Kingdom and Australia.

Low profit, reputational concerns, and rising anti-money laundering/combating the financing of terrorism (AML/CFT) scrutiny contribute to de-risking.

The CAB said it has been active in raising and advocating on the issue and its effects on the Caribbean since 2014 when it brought the matter to the attention of regional governments and other stakeholders.

In requesting intervention, it highlighted that the loss of correspondent banking relationships could render the Caribbean region unbankable and ultimately destabilise all sectors of the economies.

Correspondent banking relationships are critical for enabling key economic and financial transactions such as remittances, foreign direct investments and international trade in goods and services, which constitute some of the key drivers for sustaining the Caribbean's growth and development.

Pointing to data on the contribution of remittances, foreign direct investment and trade on gross domestic product growth in the region, the CAB said "these figures all demonstrate the extreme susceptibility of the Caribbean to de-risking practices".

According to the IMF's June 2016 Article IV Consultation on Jamaica, the trend of globally active banks scaling back their correspondent banking presence has caused interruptions in money-service businesses or cambios.

PROSPECTIVE RISK

"While this has not yet significantly impacted the domestic deposit taking institutions in Jamaica, there is prospective risk that should be addressed to avoid potential disruptions in financial services and reputational risks for the financial sector," it said.

In this regard, the report said, Jamaica should continue to address remaining weaknesses in its AML/CFT framework.

It should also enhance the risk-based supervision of the financial sector, notably the money-service business sector, and effectively communicate its compliance efforts to overseas partners.

In addition, contingency plans, including possible interventions from the Bank of Jamaica for a limited period, should be prepared in the event of a broader loss of correspondent bank linkages.

The report says possible actions currently being discussed in the Caribbean Community to mitigate the impact of the loss include collective action and bundling of services to increase the business volume brought to a smaller number of correspondent banks.

It is also considering introducing a scheme to purchase correspondent banking insurance policies, the possible creation of a United States-licensed special-purpose vehicle to process international transactions, and payment of correspondent banking service fees.

The CAB proactively influences issues impacting the financial-services sector through advocacy, education and networking.

It represents 73 banks and other financial institutions in the Caribbean with an aggregate asset base in excess of US$31 billion as at December 31, 2014.

mcpherse.thompson@gleanerjm.com