DE-RISKING IS A pre-emptive strike by global banks against many of their partners in and out of the developing world, triggering nightmares for top banking executives in Barbados and the rest of the Caribbean.
Indeed, if the assessments of international financial institutions are accurate the curbing of correspondent banking relationships (CBRs) by major private financial institutions, the Caribbean may be the world’s hardest hit region.
“The wholesale cutting loose of clients and various types of businesses without evaluating the risks they pose was not intended to be a substantive part of the fight against global financial crime and terrorism,” warned Owen Arthur, a former Prime Minister and Minister of Finance, in New York a few days ago. “But it is precisely what the de-risking exercise amounts to and where the global financial community is increasingly headed.”
Tony Marshall, Barbados’ top United Nations (UN) diplomat and the current chairman of the CARICOM ambassadorial caucus at the world body, articulated the crisis in a different fashion.
“De-risking is the sophisticated way, the nice name for the cessation or the curtailment of correspondent banking relationships,” he argued.
To the World Bank, de-risking was the “phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid rather than manage risks”.
But the Caribbean isn’t the lone victim.
A World Bank survey of banks, governments and various authorities showed that banks in Africa, Latin America, East Asia, the Pacific, Europe and the Middle East were among the prime victims.
“It is a worldwide issue,” said Marshall.
“That’s why we have discussed it at the UN and elsewhere during meetings with the European Union, the Nordic states and international financial institutions.”
Little wonder then, that within weeks of assuming duties in New York, Antonio Manuel de Oliveira Guterres, the new UN secretary general, met with the region’s top representatives and discussed the urgency of the situation.
It also explains why the State University of New York (SUNY) and the University of the West Indies (UWI) held a valuable symposium at their recently established SUNY-UWI Centre for Leadership and Sustainable Development in Manhattan and invited Arthur and several other key Caribbean economists including Dr Compton-Bourne, a former president of the Caribbean Development Bank and Dr Trevor Alleyne of the International Monetary Fund’s Caribbean Department, to examine the issue.
“We consider the correspondent banking crisis to be a crucial one for the Caribbean” said Elizabeth Thompson, executive director of the SUNY-UWI Centre.
The corresponding banking system dates back to the early days of global finance itself. The Economist of London defines it as “the informal mesh of arrangements allowing the customer of a bank in one country to send money to someone in another country, even if the bank in question does not have a branch there.”
So, when the global banks began dropping their links to indigenous financial institutions, the World Bank undertook a study to find out what was happening and why. Its findings were quite interesting.
For instance, the reductions in CBRs were hitting hard at international wire transfers. Next was its negative impact on trade. Third, cash management services and cheque cashing, clearing and settlements began to suffer.
The study discovered that more than two-thirds of financial services firms engaged in remittance and money transfer operations were the hardest hit from the reduction.
In addition, 44 per cent of the small and medium-sized domestic banks were feeling severe pain and they were followed by 26 per cent of small exporters.
“We are absolutely flabbergasted because the Caribbean has been identified as the most adversely affected region in the world,” said Marshall.
“But despite that, there is absolutely no evidence of any breaches in the international tax systems by any banks in the Caribbean. “
Just as important, no Caribbean banks were found to have deviated from established international banking rules to cause a problem.
That’s not all. Caribbean banks were living up to the requirements of the Foreign Account Tax Compliance Act, the wide-ranging American law that is forcing banks around the world to provide information on Americans who have assets and accounts abroad.
Indeed, banks throughout the region – Barbados included – have been particularly aggressive in ensuring that Americans doing business in the various countries were reporting bank accounts, money transfers and other transactions to US tax authorities.
In his keynote address, Arthur warned that the “de-risking crises now raises the spectre, that if not properly addressed, a lot of transactions will be driven into the shadow market and weaken the role that the financial sector can and should play in national development”.
As he saw it, the Caribbean should not only be given a seat at the international table “where and when the (financial) rules are being drafted” but it must “find common ground with states in other regions of the world where the de-risking crisis is threatening to be a disruptive force.”
What’s clear, though, is that efforts to link the Caribbean with illegal financial dealings such as funding for terrorism are groundless. Obviously, the Caribbean may be suffering from over-zealous law enforcement monitoring in rich countries such as the US.
There is another factor involved. The islands are paying a price for the fact that many of the global banks have been slapped with huge fines for breaking global laws designed to enforce sanctions against those doing business with countries accused of supporting terrorism.
Arthur, the World Bank, Bourne and Marshall listed profitability and reputational risks as key drivers of de-risking.
Bourne, has proposed that “Caribbean monetary authorities can attempt to reduce information costs incurred by correspondent banks by assuming a quality assurance role,” that is “interposing themselves” between correspondent and domestic financial institutions as a “guarantor of regulatory observance and information integrity.”
These proposed solutions should be examined with urgency. “They are worthy of close examination,” said Thompson, a former Cabinet minister in Barbados.