‘De-risking’ by international banks poses grave threat to region – Owen Arthur

Owen Arthur

Moves by international banks to cull their relationships with banks in the Caribbean represent the “potentially most devastating threat” to the region’s development, according to former Barbadian Prime Minister Owen Arthur who warned that it could restrict Caribbean economies from access to global finance and impact negatively on remittances.

Owen Arthur
Owen Arthur

In recent years, major international banks have been cutting their relations with banks in developing countries. This, according to the Economist, was sparked by a series of prosecutions of big international banks in the US for lapses in their controls relating to money-laundering, sanctions and the financing of terrorism. Some have had to pay billions of dollars in fines.

The Economist had reported that the rapid culling of banking relationships and retreating from markets, countries and lines of business that might attract the ire of regulators or prosecutors was a pre-emptive move in the face of American regulation. This widespread practice has been termed “de-risking.” It noted that it is fraying the network of relationships that tie the global financial system together, driving up the costs of finance for poor countries and people.

One of the main casualties is the institution of correspondent banking, the Economist had reported. This is 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.

At a recent forum hosted by the Caribbean Policy Research Institute (CaPRI) in Jamaica on the matter, Arthur said that the issues related to correspondent banking represents a formidable challenge for the Caribbean.

“But it assumes alarming proportions when viewed within the context of the totality of the challenge with which the Caribbean society has to grapple to assure itself of a stable and successful existence,” he said, according to the text of his speech made available to Stabroek News.

Arthur argued that Caribbean countries are arguably now in a more vulnerable condition than they have ever been in their post-independent existence. He cited a number of issues in this regard including new trading relationships which offer less protection to Caribbean economies.

The former Barbados PM declared that for the Caribbean to attain and stay on a viable path to growth and development, a concerted effort has to be made to transform its economies from being trade-preference dependent economies which they have been traditionally, and debt-propelled economies which they have recently become, to being investment-driven economies, marked by a very high component of private foreign capital, and eventually, genuine export-propelled economies.

Ratio

Over the immediate future, to create the conditions to generate strong growth, the Caribbean has to increase the ratio of private capital inflows to GDP, and to use such resource flows to help build new productive capacity which is capable of being competitive in a liberalised global economy, he said.

“As such, any new measure that stands in the way of enabling the Caribbean to significantly improve its cross border economic and financial transactions must be deemed to be a serious threat to the development of the region,” Arthur declared.

He said that the “corresponding banking challenge” looms as the most recent, but perhaps the potentially most devastating threat to the stable and successful development of the region.

“It is therefore important that the Caribbean does not allow itself to become the real but unintended victim of a global effort to reduce financial crimes, to fight against terrorism by reducing its sources of finance, and quite frankly, the efforts of major banking enterprises to enhance their profitability,” he declared.

He said that the derisking that is at the centre of the correspondent banking issue, could serve to delink Caribbean economies from access to global finance at a juncture where they need to increase the ratio of capital inflows to GDP.

“It can also increase the cost of access to such finance or force economic agents in the region to resort to illicit means, further damaging the image of the region. It can also do untold damage to the financial sector in the Caribbean,” he declared. The former PM pointed out that the Caribbean financial sector is characterised by features such as shallow banking systems, undeveloped and highly concentrated financial markets and domestic currencies that are not internationally traded.

“Such characteristics predispose the Caribbean to having derisking take on a dimension that does not obtain elsewhere and which is more severe than in our jurisdictions,” he asserted.

Arthur also noted that there is a “people’s dimension” to this phenomenon. He pointed out that the Caribbean region annually receives almost US$10 billion in remittances. This has not only come to be the largest single financial inflow to the Caribbean, it is the financial resource that has enabled countless Caribbean households to enjoy sustainable livelihoods, he said.

Money services

“The threat posed by the correspondent banking crisis to money services businesses that are involved in dealing with remittances is above all a threat to the stability of the society at large and hence has effectively to be countered,” Arthur declared.

He said there is now a general understanding of the fact that issues arising from correspondent banking relationships have become of central concern insofar as they have been triggered by the global effort to reduce financial crime, fight terrorism, and, after the 2008 Global Financial debacle, to strengthen financial systems by requiring financial institutions to meet more exacting liquidity and capital requirements.

He said the Caribbean cannot profess to wish to stand askance from this global initiative.

“What it can and must do is to add its voice to those who are insisting that where rules and standards are set which are intended to be applied fairly and uniformly, this should be observed in practice,” Arthur asserted.

He pointed out that guidelines promulgated by the Financial Action Task Force (FATF) require entities to adopt a risk-based approach whereby financial institutions only terminate customer relationships on a case-by-case basis where the money laundering and terrorist financing risk cannot be mitigated.

“The wholesale cutting loose of clients, without evaluating their risks, was not intended to be a substantive part of the fight to combat global financial crime and terrorism. But this is precisely the direction in which the derisking exercise is taking the global financial community,” the former PM observed.

The global rules must be made to apply, Arthur said. He argued that there is also merit in the region taking a stand in support of a revision of the new stringent liquidity coverage ratios that are part of Basel III, which have triggered much of the profitability related issues that have prompted correspondent banks to engage in derisking.

Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector.

“Basel III has in fact redefined and reduced the value of correspondent banking balances, and this has brought new adverse dynamics to the economics of the business as it has led to a situation where compliance costs and risks outweigh returns to the enterprises involved,” Arthur said.

He charged that there is much that the Caribbean can and must do to fend off this existential threat. He observed that the correspondent banking crisis is one that does not apply only nor uniquely to the Caribbean but has far-flung implications for many countries across the globe.

“There is therefore no requirement for the Caribbean to feel that it must fight this on its own. Rather, it must form strategic alliances and commit the resources to join the other many countries and institutions which have embraced this as being a legitimate cause to be fought for in every conceivable forum,” the former PM charged.

Every sinew

He said that the region must also “strain every sinew” to ensure that its own rules, standards and enforcement mechanisms consistently meet global requirements in the fight against financial crimes and the fight against terrorism. Ideally, this ought to be a well-coordinated regional effort, he said.

He declared that it can be made to be such if the Caribbean revisits and reenergises its own efforts to integrate the regional economy.

“In this regard, the creation of a single regional market, involving the removal of barriers to the movement within the region of the flow of goods, services, capital and labour, and the creation of new rights for the establishment of enterprise, was intended to be but the first phase of the CSME,” Arthur said.

“The second, involving the creation of a virtual single economy, as set out in the Girvan Plan of 2007, envisioned harmonized and coordinated regional actions and programmes, including regulatory and supervisory systems, that could significantly enhance the region’s ability to strengthen the economic and financial infrastructure on which its economy rests, and enable it to fend off threats and grasp opportunities through concerted regional actions where initiatives at the domestic level alone could not suffice,” he added.

He pointed out that the plan to move to a Single Economy called for the putting in place, for example, of a Regional Financial Services Agreement and a Regional Investment Code, which, if brought into existence, would have been designed to govern and bring order to the operation of the regional financial sector, and set out clear guidelines concerning that sector’s relationship with the global economy.

“The issue now being grappled with concerning correspondent banking surely must accentuate the need for the Caribbean to have in place mechanisms that can allow it to respond on this matter, as on all others, in a coherent and sustained manner, rather than in a spasmodic way, to the challenges which will continuously come our way from having to function as the world’s smallest and most vulnerable economy in a turbulent and unforgiving global economic arena,” Arthur said.

“That was the great cause intended to be served by the creation of a virtual single regional economy. It is the great cause to which the region must return, fortified by the conviction, expressed by Norman Manley in 1947, that “great causes cannot be won by doubtful men”,” he declared.

 

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