Tue | Aug 22, 2017

The danger of de-risking Jamaican banks

Published:Thursday | February 18, 2016 | 2:00 AMPaget Defreitas

There is a lurking danger to Jamaica's participation in the global banking arrangements, except on its outer periphery and merely as an outpost for subsidiaries of foreign banks that may not be particularly invested in the fortunes of small, emerging economy. The problem, though, is not uniquely this country, but is increasingly faced by developing nations, including those in this region. It demands a coordinated and aggressive push-back by Jamaica and its partners in the Caribbean Community (CARICOM).

The specific issue is the accelerated move by banks in developed countries to drop their correspondent banking relations with those in emerging economies. The upshot is the inability of a Jamaica-based bank to clear payments or process other transactions for clients, say in the United States, Britain, Germany, or Japan.

Recent examples of this abound, such as the problems that Jamaica National Building Society (JNBS) encountered for a time with its money transfer business in the Cayman Islands because of the withdrawal of correspondent relationships by banks in that territory, and the decision by National Commercial Bank (NCB) to discontinue some types of money transfer operations. There is also the case of Barclay's Bank in the UK advising customers resident in Jamaica that it was no longer interested in their accounts.

This, of course, is problem for a country which receives more than US$2 billion a year from Jamaicans living abroad, a sum equivalent to the island's gross earnings from tourism. Some of that money is invested, but mostly used for the recipients' living expenses. In any circumstance, these inflows remain critical to the national economy.

This so-called de-risking from Jamaica and the Caribbean by the major banks is how they have broadly responded to enhanced scrutiny from US and European regulators for compliance with anti-money laundering and anti-terrorism regimes. Among the often cited concerns is the US$1.9 billion fine the American authorities imposed on HSBC Holdings for allegedly maintaining accounts for Mexican drug cartels, among other violations. The multinational banks argue that even as they sanitise their own systems against such contamination they have no control over what happens with their correspondent banks in emerging market.

This approach, based primarily on what these multilateral banks see as the small returns on such operations against the hassle of regulatory compliance, is to apply a bludgeon to developing countries. For, in the case of Jamaica, the shut out of this country's domestic banks has happened even in the face of an even more robust enforcement of an already tough know-your-customer regime by domestic banks and their regulators.

A number of potentially bad consequences can flow from this approach to an admitted serious problem.

First, banking and other forms of financial mediation are integral parts of today's globalised economy. Correspondent banking relationships is part of this mix. Shutting out, or limiting access of some countries to these arrangements increases transactions costs in their economy, thus weakening their prospect for growth and development - or worse.

Further, it undermines the efficacy and competitiveness of home-grown banks against the subsidiaries or branches of foreign banks. While the former will have to turn hoops to engage in international transactions, for the latter it is merely a pass-through arrangement with their parents. This is hardly good for competition, the survival of domestic banks or the health of emerging economies, which is why Jamaica and CARICOM should be making a lot of noise.