Correspondent banking: A global issue and not an issue of the offshore sector of Seychelles |20 March 2017
In the past few days, we have heard about the “corresponding bank” issue. This is a matter of grave concern for the Seychelles. Fingers are being pointed at our International Financial sector and the SIFSA has cause for concern.
On July 18, 2016, Christian Lagarde, addressed this very issue in her speech at the New York Fed and I quote the relevant extract: “Today, however, please allow me to speak about the ‘smaller’ financial players of this world. They include banks and their clients from developing countries, small island economies, and some emerging market economies with small financial systems.
These institutions do not play a big role in the world of global finance. And yet, for their home countries, a well-functioning financial system is just as essential for growth as in the large economies. These countries, too, need to ensure an efficient allocation of capital. And they need ways to empower the poor and the small to participate in the economy.
I am concerned that not all is well in this world of small countries with small financial systems. In fact, there is a risk that they become more marginalised.
This has to do with the fact that large global banks are under pressure to raise capital, streamline their business models, and re-evaluate their risk exposures. As a result, many of them have been in the process of closing business lines that they consider marginal to their bottom line, or detrimental to their risk profile.
So, large banks are withdrawing from smaller countries. This is perhaps most evident in the decline of correspondent banking relationships – a serious concern for those countries that have few avenues for participating in the global payment and settlement systems.
Why should we care about this problem? Because affected countries often are very vulnerable – they include small island economies and countries in conflict. These are countries with minimal access to financial services in the best of circumstances. And there are also larger countries whose economies rely heavily on cross-border flows, such as remittances, and where development is now at risk.
And even if the global implications of these disruptions are not visible so far, they can become systemic if left unaddressed.”
The speech further analyses the root causes, the affected and the possible solutions.
To arrive at the root cause, the many dimensions of the problem have been looked at –
1) Private banks who are businesses and make their business decisions everyday;
2) Regulators who have to take the economic and financial stability, treasuries;
3) Finance ministries who have to worry about tax revenues and money laundering;
4) Security Agencies who are trying to limit the abuse of the financial system to finance terrorist activity.
Who is affected?
The IMF (International Monetary Fund) on their fact finding mission found that the impacted countries span several continents and their lifelines are at risk – Africa, the Caribbean, Central Asia and into the Pacific. As per the IMF, in the Caribbean, 16 banks across five continents lost their correspondent banking issues; in Liberia 75 correspondent banking issues were impacted.
The major case for the pull out was low profitability and high risk by the private banks who provide this service. It is not a small country issue – according to the IMF, Philippines and Mexico where remittances were hardest hit play a large role.
What is the way forward?
As mentioned, the problem has many dimensions and players. To put it in the words of Christian Lagarde “I understand Aristotle as saying that the responsibility cannot just be on one individual group of actors to show their good qualities”.
Therefore, each has an important role in resolving it according to the IMF:
1) Regulators also have an important role to play. They need to upgrade their infrastructure. They should continue their outreach and dialogue with global banks and affected jurisdictions to clarify – and consistently communicate – regulatory expectations. There is also room to collaborate further with other public authorities to improve compliance and mitigate disruptions in key business categories such as remittances.
2) Banks and financial industry – Technology confirming the authenticity and legitimacy of transactions thereby reducing compliance costs. Industry efforts to support bankers and the financial industry on implementing AML/ CFT regulations.
3) The informal sector - The “fintech boom” - If the banking sector leaves it, this will emerge; it may not have positive effects on society but would benefit customers who could benefit from increased efficiency.
Conclusion
Our tiny island state is one of the many being affected by the “corresponding bank” issue, which is now becoming a global phenomenon. There is much work for all of us players to do. In the words of the IMF, we all have a role to play in resolving this.
Rather than to observe the situation, let us start by acknowledging this global problem by creating an action plan with dates and deliverables and by getting our best and brightest from the public and private sector for the way forward.
Ina Laporte
Chairperson
SIFSA (Seychelles International Financial Services Association)