Resolving The Corresponding Bank Issue

By Kwame Venner, Economist

A correspondent bank (CB) is a financial institution that provides services on behalf of another — equal or unequal — financial institution. It can facilitate wire transfers, conduct business transactions, accept deposits and gather documents on behalf of another financial institution. Correspondent banks are most likely to be used by domestic banks to service transactions that either originate or are completed in foreign countries, acting as a domestic bank’s agent abroad.

Over the last five years, a number of international banks have restricted or ended their relationship with the region due to concerns about money laundering, fraud and terrorist financing and the concomitant existential threat of hefty fines. The Caribbean Association of Banks says that almost 60 percent of member institutions that it has interviewed report a loss of such relationships. These relationships are critical because most Caribbean economies are pivoted on tourism, remittances and trade.

The response of the Caribbean has been, inter alia, collaborating to set up the regulatory environment to efficiently supervise banking and money services and to identify and manage the money laundering and terrorism financing risks in the financial sector with the assistance of a number of multilateral institutions, notably the International Monetary Fund (IMF).

To be fair to the CBs, the withdrawal of services is partly a reflection of cost-benefit tradeoffs growing out of increased regulation and enforcement affecting international banks. Regulatory reforms have generated increased bank capital and liquidity requirements. This has contributed to reduced profitability of correspondent banking. With many separate financial entities in the Caribbean, there are relatively few financial transactions per entity, making it uneconomical for the CBs. This has been a perennial complaint of the CBs over many years.

Also, compliance costs have increased because of the intensified efforts to combat money laundering and terrorism financing. These risks have been amplified given the significant inadequacies of regional customer due diligence policies and structures compared to those which exist in developed states.

In the quest for an appropriate response to these serious challenges, greater thrust should be expended to introduce mechanisms and structures that promote more self-reliance in achieving our development aspirations. In that connection, tremendous support and guidance can be sought from the Revised Treaty of Basseterre (2011) designed for the Organisation of Eastern Caribbean States (OECS). This treaty provides the political, economic and administrative framework and architecture for executing the substantial adjustment required to achieve the socio-economic development of the economies of the member states.

Interestingly, the region has been lobbying the developed states and their correspondent banks to reconsider their decision to terminate their banking relationships with the region. While these lobbying efforts are a worthy diplomatic and public policy response given the certain deleterious socio-economic impact in the region of the withdrawal of CB services, the optimal solution is, in keeping with the spirit of the Revised Treaty of Basseterre, a structured approach which fosters more profound collaborative relationships among the islands in the Caribbean and critically modernizes our financial architecture.

Starting sequentially and logically, one can address the solution with the Eastern Caribbean Currency Union (ECCU) given its common currency arrangements. The solution begins with the creation of a single financial entity comprising the indigenous banks and credit unions.

The raison d’etre of this aggregated entity is three-fold:

1. Establishing a branch presence in the global financial centres: By pooling resources among indigenous banks and credit unions in the ECCU, it becomes cost-effective to create a combined financial entity that can establish a branch in the global financial centres. Simultaneously, it immediately resolves the problem of the handling of a relatively few number of financial transactions per entity. Moving from disparate financial units to one entity aggregates the transactions under one umbrella, thus minimizing transactions costs.

In addition, the very high compliance costs imposed by much higher financial regulations can be absorbed with substantially less difficulty by the combined entity compared to relatively small and separate financial entities.

In the circumstances, the combined entity can discreetly apply for a financial license which is not as onerous as a full banking license but would still allow the branch to offer a variety of financial services. A full banking institution in the United States attracts capital requirements of between US$10 million and US$30 million.

Thus, local banks can have a branch presence in these jurisdictions to allow a variety of financial transactions, e.g. wire transfers without having to rely on the foreign banks to provide these crucial services for the Caribbean.

2. Collection of relevant intelligence: Apart from the usual services of collecting deposits, advancing loans, offering credit facilities, etc., modern banking engages in the sophisticated activity of intelligence gathering of the financial behaviour of its clientele. This intelligence gathering includes, but is not limited to, regular data collection and monitoring.

If a branch of the aggregated entity exists in these global financial centres, e.g. New York and London, it could share and access such information with/from the other banks in these jurisdictions. This information management significantly addresses the concern of money laundering and terrorism — the key angst of the developed countries.

3. Support of the Diaspora: Lastly, but very meaningfully, the branch in the financial centre can benefit financially and otherwise from the support of the Diaspora. This would be a tremendous source of pride as the Diaspora can now identify with another major Caribbean presence in their lives in the metropolitan countries.

Although it may seem overwhelming, the correspondent banking issue presents a great opportunity for the region to demonstrate its collective resolve and ingenuity in meeting and overcoming the global dynamics of our existence. The region must move passionately to grasp the opportunity.\

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