WASHINGTON: Major global banks’ elimination of correspondent banking relationships (CBR) could threaten growth and financial stability in some small countries, the IMF said in a report released on Thursday.
IMF researchers found that smaller states in Africa, the Caribbean, Central Asia and the Pacific islands have been among the most affected by global banks’ decisions to withdraw some of these relationships.
Among reasons for the moves, the researchers cited banks’ desire to reduce risks associated with money-laundering or terrorism financing, comply with international sanctions or reduce regulatory compliance costs that had made such business unattractive.
The reductions in CBRs could lead to fewer channels for some countries to receive remittances from overseas workers and for business transactions in US dollars or other reserve currencies, and could ultimately hamper lending and economic growth.
In Belize, the IMF study showed that only two of the nine domestic and international banks serving the country have managed to maintain full correspondent banking relationships, forcing others to turn to non-bank providers of payment services. Even Belize’s central bank has been cut off by two global banks, it said.
Termination of money transfer services in small Pacific states due to anti-money laundering and anti-terrorism finance compliance has hurt foreign remittances, undermined financial inclusion and increased the hand-carrying of cash, the IMF study said. In some countries, such as Samoa, remittances amount to one-fifth of GDP.
The IMF researchers said that regulators in major economies should pursue greater outreach to banks to make clear their expectations for anti-money laundering compliance and address legal impediments to continuing CBR arrangements. Regulation in smaller jurisdictions should be strengthened and brought in line with international standards, which would help reduce risks.
The IMF said industry initiatives can help mitigate compliance costs associated with CBRs. It said one potential solution would be for global banks to bundle other financial services, such as credit card clearing, letters of credit and wealth management products with CBRs to spread compliance costs over more services.
