Big banks moving to limit risk exposure to asset portfolios are systematically eliminating their corresponding relations with banks in the Caribbean and Central America. The process, known as de-risking, has sounded alarm bells throughout the region.
“It has had a tremendous effect. We have a small number of banks and each of those banks has lost at least one of its corresponding banking relationships. This means our connection to the outside world is really hanging by a thread. We are one or two terminations away from a real crisis,” Camillo Gonsalves, economic planning minister of Saint Vincent and the Grenadines, told GlobalMarkets.
The lack of corresponding banks makes trade more expensive and limits engagement by foreign investors. It has also affected the government’s capacity to engage in state-to-state transactions and even dealings with multilateral institutions. It is also putting a crimp on tourism, the life blood of many small island economies, because tourists are not able to pull cash out of bank machines.
According to a study by the UN’s Economic Commission for Latin America and the Caribbean, 64% of the region’s banking sector has been adversely impacted by de-risking. One of the hardest hit countries has been Belize, which has lost all but two corresponding banking agreements. Prime Minister Dean Barrow said in late September, after completion of an IMF Article IV consultation, that the banking and financial sectors are constantly under threat.
“In countries that are small, vulnerable, open and do a great deal of their business through international transactions, disconnection from the global economy is potentially devastating,” said Gonsalves.
Dirty laundry
The de-risking process is a response to a global effort to deal with money laundering and financing of terrorism. Jamaica’s central bank governor, Brian Wynter, said many small countries were not involved in these crimes, but were suffering the consequences.
He and Gonsalves said it has simply become easier for banks to sever corresponding relationships than make the effort or incur the expense of maintaining ties. “Saint Vincent and the Grenadines has a well regulated financial sector, we are clean,” said Gonsalves. “De-risking was supposed to deal with money laundering, grey lists, black lists. We and many other countries are caught up in a series of regulations that make it cheaper for banks to cut ties and than continue to do business with us.”
Wynter said that while Jamaica has so far avoided the crisis, “because our own financial institutions are de-risking, avoiding sectors where cash is king and could feed money laundering” this created domestic problems for money exchange houses and other components that were important in rural areas. “We need to transmit that de-risking should not have a blanket application,” he said.