This week the Commonwealth is convening a meeting of banks, financial gurus and global regulators to explore solutions to the decline in international banking partnerships. Experts will review the Disconnecting from Global Finance report, which highlights the deteriorating number of Correspondent Banking Relationships (CBRs) - partnership arrangements between small local banks and major international banks – and offers solutions to address the issue.
Known in business terms as “de-risking” – the growing trend is seeing international banks curtail relationships with local banks in vulnerable economies. These bigger banks are now avoiding banking customers they deem low profit or high risk, in part because of new regulations that are designed to stop the financing of terrorism and fight corruption.
The Executive Secretary of the Financial Action Task Force (FATF) - the international anti-money laundering and counter financing terrorism standard setter - will join a Commonwealth panel of experts on 10 August to examine the solutions proposed by the report. The British Bankers’ Association, HSBC Holdings, Santander and the Wolfsberg Group will also attend the event at the Commonwealth headquarters in London.
“In a tougher regulatory environment, many international banks are weighing up the profits derived from these relationships against the risks posed by doing business with these clients and deciding that it is just not worth it. For example, the risk of being landed with huge fines if it turns out the smaller customers they are working with are being used to launder money or finance terrorism.” Commonwealth expert Sam Attridge said.
#DeRisking practices will likely result in further isolation of communities from the global financial system.
— The Commonwealth (@commonwealthsec) August 9, 2016
She added: “Our research shows a really worrying rise in CBR closures, doubling year-on-year since 2013. This is particularly detrimental to the vulnerable economies and small states of the Commonwealth, who risk becoming marginalised from the global finance system, curtailing their access to essential cross-border financial services such as trade finance and remittances. Not only is there a risk that financial stability is undermined, but the ability of many of the most marginalised countries to achieve their sustainable development goals is under threat.”
The Commonwealth report proposes measures such as best practice standards for money service businesses to boost their legitimacy and reputation, and improving guidance and risk-tolerance standards for banks, balancing the need to prevent illegal activity with ensuring smaller institutions in developing countries are not excluded from the global financial system.
The paper also proposes building capacity for financial regulators in developing countries and ensuring they are part of global conversations on the setting of these standards and policies.
“If de-risking continues unabated”, warns Commonwealth Deputy Secretary-General Deodat Maharaj, “many Commonwealth countries could face being largely cut-off from the global financial system. 31 of our 53 Commonwealth countries surveyed in the report described the loss of correspondent banking as one of their top concerns. This issue also topped the agenda at the Caribbean Community Heads of Government summit last month, because the implications for money transfers, trade and economic development are really worrying.
“We are already seeing a dramatic rise in the cost of sending money from country to country. These remittances are a lifeline for many families and member countries’ economies, but transaction fees have risen to 12 or 13 percent of the amount transferred in many countries,” he said.
Mr Maharaj stressed that the Commonwealth Secretariat is committed to further research and ongoing dialogue and advocacy on the issue, including working more closely with the FATF.
“Our survey captures the voices of developing countries’ central banks, and their message is clear ‘we need urgent action on this’. Our panel discussion will give us the opportunity to define the Commonwealth’s role in achieving that delicate balance between protecting our communities from terrorism and corruption, and ensuring that developing economies continue to have access to the relationships and services they need to thrive.”