Bank derisking problem on the wane - BOJ, IMF see signs of repair in correspondent relationships
The International Monetary Fund (IMF) is trumpeting gains on the correspondent banking crisis, once seen as a near-intractable problem requiring intervention by powerful external sources to correct - and Jamaica's central bank agrees that the tide is turning.
Two staff members of the International Monetary Fund penned an op-ed in December asserting that the vacuum created when correspondent banks in North America and Europe began cutting ties with regional institutions as a means of managing money-laundering risk, is in the process of repair.
IMF Resident Representative Constant Lonkeng Ngouana says the fund is aligned with that view, and had come to the conclusion only after stakeholder review.
"The conclusion that correspondent banking difficulties have lessened is based on the feedback received during a round table that was held here in Kingston last month, co-organised by the IMF and the Bank of Jamaica," said Lonkeng.
"There was indeed broad consensus that the situation has stabilised as a result of better communication, increased training, and consolidation of transactions - available data indeed point to a recovery in the value of cross-border transactions across the Caribbean since the second half of 2016; banks in the region have also been able to secure new CBRs following earlier withdrawals."
Alternative strategies working
The writers of the op-ed - Trevor Alleyne and Krishna Srinivasan of the IMF Western Hemisphere Department - argue that the alternative strategies are working to fill the vacuum. They also recommended the continued consolidation of transactions among regional banks; reduced use of cash in US dollar transactions; and the deployment of financial technologies, such as mobile banking or blockchain, as alternatives to cash.
"We are in full agreement with the essence of the op-ed piece ...," said John Robinson, senior deputy governor of the Bank of Jamaica on Wednesday.
"Over the course of the last two years, better communication between domestic and foreign partners as well as the targeted training of compliance officers have helped to dissipate uncertainty and clarify expectations across the board. As a consequence, there is no evidence of any recent deterioration in correspondent banking relations involving Jamaican banks," he said.
Robinson noted that the BOJ itself had hosted the most recent round of discussions among correspondent banks, regional commercial banks, regulators and the IMF in November 2017.
"From the beginning of the derisking saga in Jamaica, the most troubling risk that correspondent banks enunciated was the sheer volume and the potential loopholes related to foreign-currency cash transactions. Strong and continuous efforts to manage the associated risks have thus been made by all concerned - banks, regulators and money service businesses. As the main intermediaries, commercial banks have been obliged to exercise additional care in managing their relationships with customers who deal heavily in cash," said the senior deputy governor.
"At the same time, it is clear that in order to widen participation rather than restrict access to the financial system, what could help is a system that can reliably identify transactors and the sources of their financial flows. Such a technologically enabled system can provide a means of attenuating risk while allowing for the widest possible measure of financial inclusion," he said.
The central banker predicts the financial sector would likely pursue investments in technological solutions in the coming year.
Correspondent banks domiciled in the United States and the United Kingdom had been applying restrictions to regional markets or cutting services altogether. The first signs began in 2011 when a Canadian-owned Jamaican bank began cutting ties with money-services businesses; and escalated sometime around 2013 and onwards, when the overseas correspondent banks themselves began to feel the pressure from their own regulators.
Barclays Bank, for example, was fined £72 million by the UK-based Financial Conduct Authority in November 2015 for "failing to minimise the risk that it may be used to facilitate financial crime".
Last year, the IMF said Barclays was one of the most active in withdrawing correspondent banking services, closing the accounts in the UK of several nationalities, including Jamaicans.
The Alleyne-Srinivasan op-ed attributed progress on the derisking crisis to three key initiatives mutually agreed to by the banks at an IMF event in February 2016.
"First, communication has greatly improved. Second, correspondent banks are providing targeted training to help improve Caribbean banks' capacity to manage risks. Third, in response to concerns by correspondent banks of low profitability of CBRs with Caribbean banks owing to the typically small volume of business, there has been meaningful progress in consolidation of transactions via a global intermediary bank that has 'onboarded' more than 20 respondent banks in the region," they wrote.
The writers noted, however, that "the situation is still fragile" as regional banks have fewer correspondent relationships and anymore fallout "could be catastrophic to commerce".
They recommended more consolidation of banks. For example: "In the Eastern Caribbean, where 20 licensed banks serve a population of just 600,000, banks are typically too small to efficiently implement the tighter risk management protocols required by correspondent banks."
Lonkeng agreed that the "risks still remain," saying there was still need for reforms on a number of fronts, including further advancement of AML/CFT regulations.
Robinson also said the BOJ endorsed the measures, including consolidation and the need for fewer US dollar transactions.
Jamaica Bankers Association President Nigel Holness is yet to weigh in on whether the banks are as bullish as the watchdogs on the ameliorating dangers of derisking.