by Charlie Bush
The Caribbean’s financial industry has been severely affected by de-risking in the past two years. Various organisations and institutions have attempted to measure the extent of this phenomenon, including the Caribbean Association of Banks’ correspondent banking survey. Published recently, the survey and its accompanying report provide detailed information on how this region has been significantly damaged by regulators in the USA and Europe. Some of the results appear to fit with common assumptions made regarding de-risking; others however come as a surprise.
- 38 banks responded to the CAB’s survey.
- The results reveal that 58% of the respondents had lost at least one Correspondent Banking Relationship (CBR). (See Figure 1).
- The most affected countries are Suriname, Guyana and Jamaica.
These results correlate with research conducted by the World Bank in 2015. Their statistics found that the Caribbean was the worst affected area globally, with a majority of the region’s banking authorities reporting a remarkable decline in CBRs. Evidently this is a serious ongoing problem which still presents no signs of resolving itself.
What motivates foreign banks to close CBRs is difficult to determine. The report emphasises the fact that Suriname and Guyana are the most affected jurisdictions in the entire region and adds that FATF identifies the two countries as having key AML/CTF deficiencies. Nevertheless, this is the only reference to a justification for the termination of CBRs in the document. It would have been interesting to discover whether Caribbean banks are given a reason for having their CBRs terminated, and if so, whether those reasons are related to international regulators, reputational risk, or cost-benefit assessment.
North American banks are often denounced as the most aggressive de-riskers. There is an assumption that fear of heavy fines for low-profit relationships is motivating them to close accounts in all regions that are considered “high risk”.  Moreover, given the Caribbean’s geographic proximity to the U.S., and the two region’s close trade links, it seems natural that American banks would have a higher proportion of CBRs with Caribbean financial institutions than anywhere else in the world. However, the CAB’s findings reveal that if their data was adjusted for the Bank of America by giving each USA bank an equal weight, it is actually Europe that becomes the most aggressive area for de-risking. Indeed, after Bank of America, the Dutch ING Bank has terminated the second highest number of CBRs, with German Commerzbank coming a close third. (See Figure 2)
The victims of de-risking
Regrettably, information on the respondent banks themselves has been omitted from the report. This could have offered a much deeper insight into the types of banks which are victims of de-risking. Since the policy of de-risking ultimately comes down to risk versus profit, it would be interesting to confirm whether smaller indigenous banks have been hit harder by de-risking than larger international banks in the same regions. Provided with this intelligence, it would be more obvious whether American or European banks are labelling entire Caribbean jurisdictions as high-risk indiscriminately, or if they are treating each institution on an individual basis.
As the future seems to hold little chance of international banks exposing themselves to the possibility of being fined or being otherwise penalised for the sake of a CBR, it is the work of groups and representative bodies like the Caribbean Association of Banks that is crucial for raising awareness and trying to find a solution to the de-risking crisis. This informative and illuminating report contributes to a growing body of research on the facts of de-risking and exposes the pervasiveness of this detrimental practice.
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