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THE EXPOSURE OF OUR FINANCIAL SECTOR to the international financial crisis was limited because of the sector’s relatively secure funding base, high capitalisation, and limited foreign exchange exposure. However, the Great Recession that resulted from the financial crisis had a negative impact on real GDP growth in the Caribbean. To date, the region’s economic recovery has been slow. Although the Caribbean economy is expected to expand this year, the pace of expansion remains fragile and uneven across the region.
The financial sector in the Caribbean is still facing some challenges that create a downside risk to our growth prospects. One of these challenges is the end of correspondent bank relations.
The ending of correspondent bank relations with Caribbean financial institutions can be ascribed to the so-called “de-risking” by financial institutions, particularly in the United States.
De-risking occurs when financial institutions end or restrict business relationships with certain categories of customers. When banks establish correspondent bank relations, they must perform normal customer due diligence on the respondent banks.
Furthermore, they are required to gather information about the respondent bank to determine its soundness and the quality of supervision.
With the implementation of global regulatory standards, including anti-money laundering (AML) and counter terrorist financing (CFT) rules, banks have faced increased compliance costs in providing correspondent bank relations. In addition, tax information sharing agreements that also result in more costs for the banks have added to the de-risking trend, which results in the ending of correspondent bank relations. Both the domestic banking sector and the international financial services sector in the Caribbean face this challenge.
More specifically, in the case of the Caribbean banking sector, the cost for the correspondent bank to perform the customer due diligence and gather all required information is too high, given the relatively small size of our banks, making the business not profitable enough for the correspondent bank.
Meanwhile, in the case of the international financial services sector, many correspondent banks have ended relations because of the high perceived risks of some clients, particulary clients from some Caribbean and Latin American countries.
A correspondent bank relation is crucial for financial institutions in the Caribbean given their limited access to foreign financial markets. Also, with a correspondent banking relation, Caribbean financial institutions cannot properly service clients’ accounts. Therefore, actions are needed to address this issue effectively. In this context, the financial institutions should be the first to take the necessary steps. Because of the relatively small size of our institutions, collective actions through, for example, the Caribbean Bankers’ Association, are recommended. These actions should include lobbying to maintain correspondent bank relations.
Furthermore, the financial sector supervisory authorities should communicate the progress made in implementing international rules and recommendations to strengthen the financial sector including the AML and CFT rules. This information will reduce considerably the transaction costs related to information gathering by correspondent banks.
One of the main lessons of the international financial crisis was that international policy coordination and cooperation is crucial to reduce the risk of future crises. This lesson continues to be important today. If we want to address the challenges the Caribbean financial sector is facing, including the ending of correspondent bank relations and cybercrime, we need to join our forces and take collective action.
Shelwyn Salesia is director of supervision at the Central Bank of Curacao and St Maarten.